Centre's plan to raise ₹20,000 cr via green bonds is conditional on greenium

Greenium, or green premium, is the difference between the yield or the return investors receive on a green bond and a similar conventional bond. 

It's the amount by which the yield on the green bond is lower due to investors' willingness to accept lower returns in exchange for the perceived benefits of investing in a green instrument.

The yield on the benchmark 10-year government bond stood at around 6.828% on Tuesday, down from 6.852% on Monday.

Also Read: Mint Explainer: Why the government is embracing sovereign green bonds

On 26 September, the Centre announced that it would raise ₹20,000 crore through sovereign green bonds in H2, FY25.

"Green bonds are attractive instruments to raise funds only if its yield is 20-50 basis points lower than conventional bonds like the 10-year government bond. If the desired yield is not achieved, the auctions will be cancelled," said the first person of the two on the condition of anonymity.

In FY24, the government issued sovereign green bonds of ₹20,000 crore and had planned to borrow ₹12,000 crore via green bonds in the first half of FY25.

However, earlier in June, the Reserve Bank of India (RBI) cancelled a 10-year green bond auction due to the market's inability to pay the premium.

During August, RBI, on behalf of the Central Government, raised about ₹1,700 crore through green bonds, much below the total notified amount of ₹6,000 crore.

The share of borrowing under different maturities is slated to be 5.3% for three-year bonds, 10.6% for five-year bonds, 7.6% for seven-year bonds, 24.8% for 10-year bonds, 13.25 for 15-year bonds, 12.1% for 30-year bonds, 15.9% for 40-year bonds and 10.6% for 50-year bonds.

Also Read: Sovereign green bonds: Know the risks and rewards

"For green bonds to be effective in funding borrowing plans, they must offer a cost advantage over conventional bonds, particularly because of their eco-friendly label," said the second person familiar with the matter on the condition of anonymity.

"It makes sense to raise funds through green bonds only if they offer a clear benefit over conventional bonds. If regular bonds yield 6.8%, green bonds should be discounted, with yields no higher than 6.5% to 6.6% for them to be viable," the person added.

As things stand, the 10-year yield has fallen by 7.2% in the last 12 months, aided by the RBI's record surplus dividend transfer to the government. This has sparked hopes that the Centre would lower its fiscal deficit and borrowings.

Spokespersons of the Union finance ministry and the central bank didn't respond to Mint's emailed queries.

Drivers for greenium

Experts say the market needs more foreign investor participation and interest from ESG (environmental, social and governance) funds, more domestic funds focusing on ESG investments, and changes in regulations and investment guidelines for it to be able to pay the greenium.

Also Read: The test for India’s sovereign green bonds

"A major driver for greenium globally has been the strong demand from international ESG-focused funds. India’s inclusion in global bond indices like JP Morgan’s is potentially attracting more FPI (foreign portfolio investor) inflows, including from ESG-dedicated investors," said Venkatakrishnan Srinivasan, managing partner at financial advisory firm Rockfort Fincap Llp.

“The development of new investor segment/dedicated funds with a focus on ESG principles could boost domestic demand. The Securities and Exchange Board of India's recent push for disclosures on ESG ratings and sustainability-linked investments could encourage fund managers to include more green instruments, but dedicated ESG funds would be key to building sustained demand," he added.

Funds raised by selling green bonds can't be used for projects related to fossil fuel extraction, production or distribution, or nuclear power.

However, they can be used for government investments, subsidies, grants-in-aid, tax foregone or operational expenses to support climate mitigation and sustainable green initiatives to reduce carbon intensity.