What Are Green Bonds? 

The escalating impact of climate change has significantly influenced global investment strategies, prompting a growing alignment of capital allocation with climate change mitigation and sustainability goals. In response, a wide array of financial structures, funds, and global initiatives have come up to channel capital toward projects and enterprises that address environmental challenges. Corporate Social Responsibility (CSR) efforts have played a critical role in promoting environmental restoration, particularly in regions affected by industrial and developmental activities. These initiatives often focus on reversing ecological damage and fostering sustainable development. 

Over the past two decades, there has been a notable surge in both equity and debt investments directed towards Environmental, Social, and Governance (ESG)-aligned ventures. Shaped by regulatory, political and market shifts, Bloomberg projects global ESG AUM to exceed USD 40 trillion by 2030. The market has also seen a strategic shift in how sustainable or ESG-linked debt instruments like green bonds, social bonds, and sustainability-linked bonds are being marketed, structured, and labeled to better appeal to evolving investor preferences and scrutiny. This reflects a robust investor appetite for sustainable investment vehicles. 

Among the most prominent instruments in this space are green bonds – fixed-income securities specifically issued to finance or refinance projects that contribute to climate change mitigation, such as renewable energy infrastructure, energy efficiency upgrades, sustainable transportation, and clean water initiatives. As of Q3 2024, global green bond issuance reached $3.4 trillion, making up 62% of the $5.4 trillion sustainable debt market.  

These developments underscore the financial sector’s pivotal role in driving the transition to a low-carbon, sustainable economy. 

How Do Green Bonds Work? 

Green bonds operate just like regular bonds issued by corporations and governments. The only difference that exists is with respect to the use of funds. While the proceeds of regular bonds are used by issuers towards regular operations, proceeds of green bonds are used by issuers specifically to finance or refinance projects that have a significant positive impact of reversing environmental damage.  

Green bonds too offer investors interest income and principal repayments as per the predetermined structure. The issuer is generally expected to report how funds are being used and disclose the environmental impact the project has had. These bond issuances are typically rated by independent rating agencies similar to standard bond issuances, assessing the creditworthiness of the issuer. 

Green Bonds in Indian Landscape 

As of March 2025, cumulative green bond issuances in India have reached ₹6,953 crore, with tenures ranging from 1 to 10 years. These issuances span both private and public sectors, including companies such as L&T Infrastructure Finance, Tata Cleantech, and Samunnati Financial Intermediation & Services, as well as municipal bodies like Vadodara Municipal Corporation, Ahmedabad Municipal Corporation, and Ghaziabad Nagar Nigam. 

India’s green bond journey began with Yes Bank, which launched the country’s first green bond with an issue size of ₹1,000 crore. The proceeds were directed toward financing renewable energy projects. Since then, a diverse set of issuers, ranging from corporates and financial institutions to government agencies, have utilized green bonds to fund environmentally sustainable initiatives. 

In a notable example, Adani Green Energy raised USD 409 million through a green bond issuance in March 2024, which was oversubscribed seven times, attracting global institutional investors such as Jupiter, Schroders, PIMCO, and MetLife. This strong international response underscores the growing global appetite for ESG-aligned investment opportunities in India. 

Types of Green Bonds 

Green bonds are versatile financial instruments that can vary widely in their structure, type of issuer, and intended use of proceeds. These include: 

• “Use of proceeds” green bonds: Money raised is isolated and protected, only to be used for approved green initiatives like renewable energy, clean transportation, etc. 

• Asset-backed green bonds: Green bonds, secured by a pool of environmentally friendly assets, such as solar panels, wind farms, or electric vehicles, generate steady cash flows. These cash flows are used to repay bondholders, making the bond less risky and directly tying to green project performance. 

• Certified Climate Bonds: Green bonds issued to finance projects that meet defined environmental standards or deliver measurable ecological benefits. 

• Green Revenue Bonds: Green bonds that are backed by the income generated from the green projects they finance, rather than relying on the overall creditworthiness of the issuer. 

• Covered Green Bonds: Green bonds offer dual protection to investors by providing recourse to both the issuer and a dedicated pool of green assets, ensuring repayment even in the event of issuer default. 

• Securitization Green Bonds: Green bonds backed by a portfolio of green projects, giving investors the right to claim returns from the cash flows generated by the entire asset pool.  

Benefits of Investing in Green Bonds 

• Impact on the environment: Investing in green bonds helps fund eco-friendly initiatives, leading to meaningful environmental benefits like lower carbon emissions, better resource conservation, and the advancement of renewable energy solutions.  

• Growing market: The green bond market is witnessing rapid growth, fueled by rising environmental awareness and a growing appetite for sustainable investment opportunities. As this market expands, it also presents increasing potential for competitive returns. 

• Stable returns: Bonds generally provide consistent and reliable returns. Often issued by governments or well-established institutions, they are considered lower-risk investments compared to many other asset classes. 

• Social responsibility: Investing in green bonds reflects the principles of socially responsible investing (SRI), allowing investors to support initiatives that contribute to a more sustainable and environmentally conscious future. 

Final Thoughts: The Future of Green Financing 

Green bonds have emerged as a powerful tool in the global transition toward sustainability. By channelling capital directly into environmentally beneficial projects, they bridge the gap between climate goals and financial markets. With increasing regulatory support, investor interest, and corporate responsibility, the green bond market is set to play a pivotal role in shaping a low-carbon economy. 

As climate challenges intensify, the demand for transparent, impact-driven financing will only grow. Green bonds, backed by strong frameworks and measurable outcomes, are not just a trend but a cornerstone of future financial ecosystems. They offer investors a unique opportunity to achieve both financial returns and positive environmental impact, making them an essential part of the sustainable finance landscape.