What Are Green Bonds? Meaning, Types, Benefits and How to Invest in India

The concern for the environment is growing and the government and corporates are taking active steps to reduce the activities that have a hazardous impact on the environment. Apart from that, active steps are being taken to create and develop projects that are more environmentally friendly or create a positive environmental impact.

This is where green bonds come into the picture. It creates a win-win situation for all its stakeholders i.e., a good investment avenue for investors like us, a source of financing and a positive impact on the environment. So, what are these green bonds and why should we be concerned about them as investors? Find out here!

Key Takeaways

• Green bonds are debt instruments used to raise money for environmentally friendly projects such as renewable energy, clean transport and water management.
• In India, companies, municipal corporations and the government have issued green bonds to support sustainable development.
• Green bonds work like regular bonds and may offer interest payments at fixed intervals.
• The main difference between green bonds and regular bonds is how the money raised is used.
• Green bonds carry risks such as credit risk, interest rate risk and liquidity risk.
• Before investing, investors should check the issuer’s credit rating, returns, maturity date and environmental project details.

What are Green Bonds? Meaning

Green bonds are like regular corporate or government bonds that are issued to investors. One key difference that sets apart green bonds from their peers is that the funds raised through green bonds are exclusively used for financing the project that creates a positive environmental impact. This can include renewable and sustainable energy projects, clean transportation, biodiversity conservation, green buildings etc.

What do Green Bonds finance?

Green bonds primarily finance projects that contribute to environmental sustainability. Their main uses include:

• Renewable Energy Projects: Solar, wind, and hydro energy developments.
• Energy Efficiency Initiatives: Retrofitting buildings, smart grids, and green manufacturing.
• Pollution Prevention: Waste management, water treatment, and pollution control projects.
• Clean Transportation: Funding electric vehicles, mass transit, and low-carbon transportation options. By focusing on these sectors, green bonds encourage investments that align with global climate goals and support a low-carbon economy.

History of Green Bonds

Origins (2007):

The first labelled green bond, issued by the European Investment Bank (EIB), focused on renewable energy and energy efficiency.

Growth (2008–2013):

The World Bank popularized green bonds by issuing bonds that funded environmentally friendly projects across developing countries.

Market Expansion (2014–present):

Corporates, sovereigns, and municipalities worldwide adopted green bonds, with growing issuance and evolving standards like the Green Bond Principles (GBP) guiding transparency and impact.

Recent Trends:

Increasing investor demand and regulatory support (e.g., the EU’s Sustainable Finance Disclosure Regulation) have spurred innovations like transition bonds and sustainability-linked bonds.

Green Bonds Principles

Green bonds adhere to a framework known as the Green Bond Principles (GBP), which ensures transparency and credibility. The four core components are:

• Use of Proceeds: Funds must be used for green projects.
• Process for Project Evaluation and Selection: Issuers must outline how projects are selected.
• Management of Proceeds: Separate tracking and allocation of bond proceeds.
• Reporting: Regular updates on project progress and environmental benefits. Following these principles assures investors that their money supports legitimate and impactful green initiatives.

Types of Green Bonds

Green bonds come in several types to cater to different needs:

• Standard Green Use of Proceeds Bonds: Traditional bonds with proceeds dedicated to green projects.
• Green Revenue Bonds: Secured by project revenues rather than the issuer’s credit.
• Green Project Bonds: Bonds where the investor bears the project risk.
• Green Securitized Bonds: Bonds backed by pools of green assets. Understanding the different types allows investors to align their investment choices with their risk appetite and sustainability goals.

Green Bonds Issued in India: Examples

Several organisations in India have issued green bonds to raise funds for environmentally friendly projects. These include banks, companies, municipal corporations and the Government of India.

The table below shows some examples of green bonds issued in India.

These examples show how green bonds help raise funds for projects that support environmental development in India.

How do Green Bonds Work? 

As we are clear about what is green bond, let’s proceed to understand how green bonds work. Suppose the government wants to set up environmental friendly projects across the nation. However, to fund these projects, the government is aiming to raise funding from the public at large. Therefore, the government will issue green bonds to the people against which it will be paying a certain amount of interest on the same. Investors can buy these green bonds from any of the stock brokerage platforms that provide this facility.

Process of Issuing Green Bonds

Green bonds are essentially debt securities. In India, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (also known as ILDS regulations) governs the public issue and listing of such debt securities on a recognized stock exchange. Thus, the issuer of green bonds is also covered under the ILDS regulations. As the issue of green bonds is under the governance of the stock market regulator i.e., SEBI, this makes green bonds a relatively safe instrument to invest in.

While there are no set principles for the issuance of green bonds, The International Capital Market Association (ICMA) has released a document called Green Bond Principles that outlines the good practices necessary for the process of issuing green bonds. These include:

• Use of Proceeds: Issuers need to define what is considered ‘green’ for them. Disclosure should be made for which projects, activities or assets will the proceeds be used.
• Project Evaluation and Selection: What will be the process that will be used to determine whether a particular project or asset falls under the ‘green’ criteria?
• Management of proceeds: What controls or processes are put in place to ensure that the funds are only used in the ‘green’ projects and there is no misutilization of funds?
• Reporting: How the green projects will be evaluated and their progress is reported. Reporting should be both in terms of financial results and environmental impact.

Benefits of Green Bonds

As stated earlier, green bonds create a win-win situation for all stakeholders. Following are the benefits of green bonds that make them an ideal investing instrument:

• Green bonds are an excellent way to finance a cost-intensive investment project.
• Green bonds are a great source of earning passive income that is exempt from tax.
• The funds are utilized in projects that are environmentally friendly thereby working towards the cause of saving the environment.
• The green angle in the bond works great in spreading awareness among people about environmental problems. Further, it also shows that corporates and governments are taking active steps towards preserving the environment by initiating environmentally friendly projects.
• Higher demand for green bonds means lower spending from the pockets of the corporates. This money is then channelised as dividends to the investors.
• Issuers issuing green bonds earn goodwill and reputation as society perceives them as an environmentally friendly entity.
• The interest cost in issuing green bonds is lower than that charged on loans by banks and financial institutions. Therefore, they directly reduce the cost of initiating environmentally friendly projects. This acts as a motivation for other entities to undertake such projects and go green.

Risks of Investing in Green Bonds

Like other fixed income investments, green bonds also carry certain risks. Investors should understand these risks before investing.

• Credit Risk: The issuer may face financial difficulties and fail to make interest or principal payments on time.
• Interest Rate Risk: When market interest rates rise, the price of existing green bonds may fall, especially if investors want to sell before maturity.
• Liquidity Risk: Some green bonds may have fewer buyers in the secondary market, making them difficult to sell quickly.
• Greenwashing Risk: An issuer may present a project as environmentally friendly without providing enough evidence of its actual environmental benefits.
• Project Risk: The projects funded through green bonds may face delays, higher costs or difficulties in achieving their expected environmental goals.

Investors should check the issuer’s financial position, bond terms and project details before making an investment decision.

What are the Risks of Greenwashing?

While green bonds are issued specifically for environmentally friendly projects, there might be certain entities that can convey a false impression of initiating environmentally friendly projects and use the funds for other purposes. These could be done to overshadow their activities that are actually damaging the environment or to exaggerate positive image of the brand. This is known as greenwashing. The following are the risks associated with greenwashing:

• The Securities and Exchange Board of India (SEBI) has already set up an advisory committee on Environmental, Social and Governance (ESG) related matters. This committee works towards the enhancement of disclosures that are specific to ESG schemes. Further, it specifically focuses on the mitigation of risks associated with mis-selling and greenwashing.
• Greenwashing can attract stringent penalties for the issuers and entities who are conveying such false impressions.

• The investors of instruments like green bonds may lose faith in these schemes and financial instruments which will defy the very purpose for which these bonds were launched.
• Greenwashing can slow down the positive environmental impact that otherwise would have been created if the greenwashing did not take place in the first place.
• Certain entities with ill intentions can use greenwashing to hide their environmentally damaging practices. Further, creating portraying a false image of being environmentally friendly will create false impressions in the minds of the people who will then buy more products from these entities. It’s a vicious cycle that will directly damage the environment.

How Do I Know If a Green Bond Is Actually Green?

Evaluating the authenticity of a green bond involves several checks:

1. Alignment with Recognized Standards
   Ensure the bond adheres to frameworks like the Green Bond Principles (GBP) or the Climate Bonds Standard.
2. Third‑Party Verification or Certification
   Look for independent reviews or external audits that validate the environmental credentials of funded projects.
3. Clarity and Reporting
   Transparency matters — issuers should clearly outline how proceeds are used and commit to periodic impact disclosures (e.g., CO₂ avoided, energy saved).
4. Use-of‑Proceeds Segregation
   Confirm whether funds are ring-fenced and tracked separately for green projects, avoiding allocation to general corporate activities.
5. Track Record and Reputation
   Established issuers with strong ESG governance are generally more reliable. Review past performance and reporting history to assess credibility.

Green Bonds vs Regular Bonds

Green bonds and regular bonds are both debt instruments used to raise funds. The main difference is the purpose for which the money is raised.

The table below explains the differences between them.

Both types of bonds may provide interest income, but neither is automatically safer or more profitable. Investors should compare the credit rating, Yield to Maturity (YTM), maturity period and other bond details before investing.

How To Buy Green Bonds

Buying green bonds is increasingly accessible for both retail and institutional investors:

• Primary Market: Investors can participate during the initial public offering (IPO) of green bonds.
• Secondary Market: Green bonds are listed on exchanges where investors can buy and sell.
• Mutual Funds and ETFs: Some funds and ETFs specifically focus on green bond investments. Investors should verify the issuer’s credentials and ensure the bond complies with recognized green bond frameworks before purchasing.

In a Nutshell

The above insights clarify green bonds’ meaning and all the other aspects relating to green bonds. If you want to generate passive income, then green bonds are a great investment instrument. It not only helps you invest in a secure avenue but also gives a sense of satisfaction that on having invested in a pro-environment avenue. According to Climate Board Initiative, the annual issuance of green bonds can hit the $1 trillion mark in 2023.

If you are looking to invest in green bonds, you can browse all Green Bonds issued in India through IndiaBonds’ Bond Directory and access detailed information of the Bond. It is India’s first bond directory providing access to 25000+ bonds. Get all the financial details of any of the bonds you wish to invest in and begin your investment journey toward earning a good passive income. Go Green with Green Bonds!

Frequently Asked Questions

1. When were the green bonds first issued in India?

India’s first green bonds were issued by Yes Bank in 2015. The banking giant was raising Rs. 5 billion for enhancing long-term resources to fund infrastructure projects in the clean energy and renewable energy sector.

2. Which is the first ever Municipal Green Bond issued? 

India’s first ever Municipal Green Bond was issued by Ghaziabad Municipal Corporation, Uttar Pradesh raising over 150 Crores for the construction of a tertiary sewage treatment plant.

3. What is the tenure of investment in green bonds? 

Tenure of investment in green bonds may range anywhere between 2 years to as long as 20 years depending upon the issuer and the type of project for which the funding is raised.

4. What is the return on investment in green bonds?

Green bonds can yield an interest of anywhere between 6.50% to 10.5% per annum. The return is quite lucrative as compared to other investment avenues. Further, being debt instruments, they are a relatively safer bet to other volatile investment options.

5. Who issued the first green bond?

The European Investment Bank (EIB) issued the world’s first green bond in 2007, known as the Climate Awareness Bond. The World Bank followed in 2008 with its first labelled green bond. In India, YES Bank issued the country’s first green bond in 2015.

6. Are green bonds tax-free in India?

No, green bonds are not automatically tax-free in India. Interest earned from green bonds is generally taxable according to the investor’s applicable income tax rules. Investors should check the tax treatment before investing.

7. What is the difference between green bonds and blue bonds?

Green bonds raise money for environmentally friendly projects such as renewable energy, clean transport and pollution control. Blue bonds specifically focus on water-related and marine projects, such as ocean conservation, sustainable fisheries and water management. In India, blue bonds are recognised as a category of green debt securities.

Disclaimer : Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities, municipal debt securities/securitised debt instruments are subject to credit risks, market risks and default risks including delay and/or default in payment. Read all the offer related documents carefully.