India's sovereign green bond market is finding its footing, with a stable "greenium" underscoring consistent investor appetite for the country's green-labelled government debt.

Insurers in India are showing significant interest in sovereign green bonds, a development that is aiding the establishment of a substantial greenium. With market confidence in the ability to absorb a larger supply of these securities, there is a push for enhanced issuance of the bonds. Insurers need them for optimal asset allocation and regulatory advantages, emphasizing the importance of sustaining this demand in India's financial landscape.

A green bond is a debt instrument whose proceeds are earmarked for environmentally sustainable projects. Because sovereign green bonds carry the backing of the national government, they combine the credit quality of conventional government securities with a dedicated environmental mandate. The sovereign format was pioneered by Poland, which issued the first state green bond in 2016, and governments including France, Germany and the United Kingdom have since become regular issuers, giving India an established global template to draw on.

India laid the groundwork for its green bond programme with the release of its Sovereign Green Bond Framework in November 2022, and the Reserve Bank of India conducted the first sovereign green bond auctions in January 2023. Total issuance in the debut 2022-23 fiscal year came to about ₹16,000 crore (roughly $2 billion), spread across five- and ten-year securities. The framework, aligned with the International Capital Market Association's Green Bond Principles, provides for a Green Finance Working Committee to select eligible expenditures and for periodic reporting on the allocation of proceeds. The instruments have since been offered alongside the government's regular borrowing programme, with proceeds directed toward qualifying green public expenditure.

The programme ties India's borrowing plans to its stated climate commitments: under the Paris Agreement, the country has pledged to cut the emissions intensity of its GDP by 45% by 2030 from 2005 levels and to lift non-fossil sources to half of installed power capacity by 2030, alongside a national goal of net-zero emissions by 2070 announced at the COP26 summit in Glasgow in 2021.

The "greenium," or green premium, refers to the pricing advantage at which green bonds can trade relative to conventional bonds of comparable maturity, as investors accept a modestly lower yield in exchange for the environmental designation. A stable greenium is read as a sign that demand for the instruments is durable, which in turn supports the case for expanding supply.

Insurers are natural holders of long-dated government debt because their long-term liabilities match the extended maturities of such securities. Under Indian regulatory investment norms set by the Insurance Regulatory and Development Authority of India (IRDAI), insurers are required to hold a portion of their assets in approved instruments, and sovereign green bonds, as government securities, count toward such requirements, the regulatory advantage highlighted in market commentary.

With insurance-sector demand providing a steady base and confidence in the market's capacity to absorb greater supply, sustaining institutional demand of this kind is viewed as central to deepening India's green bond market and maintaining the greenium that has taken shape. The markers ahead are the size of sovereign green issuance in successive borrowing calendars and the cadence of the post-issuance allocation reporting required under the framework, which together indicate how steadily the market is institutionalising.

Source: Economic Times Markets