What Are Green Bonds?

A green bond is a debt security whose proceeds are used to fund projects with an environmental benefit. These include renewable energy, clean transport, energy efficiency, water management, waste management and pollution control.

In simple terms, a green bond is a regular bond with a stated purpose. The issuer, which can be a government, a bank or a company, borrows money from investors, pays interest (the coupon) and returns the principal at maturity. The difference is that the issuer commits to use the money for eligible green projects and to report on how it was used.

Because a green bond is still a bond, your return and risk depend mainly on the issuer's ability to pay, not on the project's environmental success.

How Do Green Bonds Work?

1. The issuer creates a framework. It lists the types of green projects it will finance and how it will manage and report the money.

2. Independent review (often). Many issuers get an external opinion or verification, commonly against the ICMA Green Bond Principles, an international voluntary standard.
3. Investors subscribe. Investors buy the bonds through an auction, a public issue or a private placement, or in the secondary market.
4. The issuer pays interest and repays principal. Payments follow the bond terms, which can be fixed or floating.
5. The issuer reports. It discloses how the proceeds were allocated and, in many cases, the environmental impact.

Green Bonds vs Regular Bonds

Feature	Green bond	Regular bond
Use of proceeds	Eligible green projects	Any general purpose
Interest and repayment	Depends on the issuer's credit	Depends on the issuer's credit
Reporting	Use-of-proceeds reporting expected	Not required for use of funds
Risk of default	Same as the issuer's rating	Same as the issuer's rating
Extra risk	Greenwashing	None

A green label does not make a bond safer or higher-yielding. The credit rating and issuer quality still decide the risk.

Types of Green Bonds in India

1. Sovereign Green Bonds (SGrBs)

Issued by the Government of India to fund green public projects. The Union Budget 2022-23 announced them, and a Sovereign Green Bonds Framework was released in November 2022. The first auctions were held in January and February 2023, raising ₹16,000 crore across 5-year and 10-year bonds, followed by further issues in later years. They carry sovereign credit risk, like regular government securities.

2. Corporate green bonds

Issued by power producers, renewable energy developers, NBFCs, infrastructure financiers and other companies to fund projects such as solar, wind or clean transport.

3. Financial institution green bonds

Issued by banks and lenders to raise money for green lending. India's first green infrastructure bond was issued by a bank in 2015.

4. Green municipal bonds

Issued by city bodies to fund projects such as sewage treatment and water infrastructure. India's first certified green municipal bond was issued in 2021 for a sewage treatment plant.

How Is India Regulating Green Bonds?

SEBI has a framework for green debt securities under its rules for non-convertible securities. In general terms, issuers must:

• Disclose the type of green projects to be financed and how proceeds will be used
• Track and manage the money for those projects
• Provide ongoing reporting on how the funds are being used

SEBI encourages the use of external reviews. The exact requirements, including the labels for other sustainability-linked debt and any recent amendments, are in SEBI's circulars and regulations. Check them for the current position.

Benefits of Green Bonds

• Diversification. Fixed-income exposure with a clear purpose.

• Predictable income. Regular coupon payments, if held to maturity and the issuer does not default.
• Transparency. Reporting on use of proceeds can help you see where money goes.
• Sovereign safety for government issues. Government green bonds carry the same credit risk as other government securities.
• Alignment with values. Investors can channel money to environmental projects.

Risks of Investing in Green Bonds

• Greenwashing. A bond may be labelled green without delivering the promised environmental outcomes. Check the framework, eligible projects and any independent review.

• Credit risk. The issuer may delay or default on payments. Look at the credit rating and financial strength.
• Interest rate risk. Bond prices fall when market interest rates rise, which matters if you sell before maturity.
• Liquidity risk. Trading in many green bonds is thin, so you may have to sell at a lower price or wait for maturity.
• No guaranteed yield advantage. There is no assurance that a green bond offers higher returns. Reports note that Indian sovereign green bonds have priced broadly in line with conventional government bonds, and have seen weak demand in some auctions.
• Project risk. If the financed project fails, it can affect the issuer's finances, depending on the structure.
• Reinvestment risk. Coupons and maturity proceeds may be reinvested at lower rates.

How Are Green Bonds Taxed?

Green bonds generally receive no special tax treatment. As a general guide (check the latest rules):

Item	Typical treatment
Interest (coupon)	Taxed at your income tax slab rate
Gains on sale within 12 months	Short-term capital gain, at slab rate
Gains on sale after 12 months (listed bonds)	Long-term capital gain at 12.5% without indexation

Some municipal or infrastructure bonds may have specific tax notifications, so read the offer document. Tax rules change, so confirm with a tax professional.

Retail Investment Options for Green Bonds

Retail access to green bonds in India is still limited, but there are a few routes.

1. Sovereign green bonds

These are mainly bought by institutions through RBI auctions. Retail participation has been marginal, and the secondary market is thin. Check whether your broker or the RBI Retail Direct platform offers a specific issue.

2. Corporate green bonds and NCDs

Listed on exchanges or offered in public issues. If you have a demat account, you can buy listed green bonds in the secondary market, or apply when an issuer opens a public issue. Check the rating, the green framework and the use of proceeds.

3. Online bond platforms

SEBI-registered online bond platform providers list bonds, including green bonds, with online KYC and UPI payments. Some platforms allow small ticket sizes. Make sure the platform is SEBI-registered and read each issue's details.

4. Funds that hold green bonds (indirect)

Some debt funds and sustainability-themed funds may hold green bonds, but they may not be dedicated green bond funds. Read the fund's portfolio and mandate.

Minimum investment amounts vary by issue and platform, so check before applying.

How to Check Whether a Green Bond Is Really Green

1. Read the offer document and the issuer's green bond framework.
2. Match the projects to eligible categories such as renewable energy, clean transport or water management.
3. Look for an independent review or verification.
4. Check reporting. See whether the issuer publishes allocation and impact reports.
5. Check the issuer's credit rating and finances.
6. Be cautious about vague claims. If the use of proceeds is unclear, treat the green label carefully.

Tips for Retail Investors

• Start with the issuer's credit quality, then look at the green label.
• Do not chase a "green" label for higher returns. It does not guarantee them.
• Check the liquidity. Know how easily you can sell before maturity.
• Match the tenure to your goal and be ready to hold to maturity.
• Diversify. Do not put too much of your money in one bond or issuer.
• Use a SEBI-registered platform or your broker.
• Compare the post-tax yield with other fixed-income options.