The Institute of Energy Economics and Financial Analysis (IEEFA) has released a briefing note highlighting the rising importance of green bonds in India’s transition to a low-carbon economy, while also drawing attention to the significant challenges that could hinder their growth. Green bonds, which are debt instruments used to fund environmentally friendly projects, are expected to see strong demand as the country moves toward decarbonization.
However, the note emphasizes that regulatory hurdles, market inefficiencies, shrinking green premiums, and growing public scrutiny could restrict their potential. A central issue lies in how green bonds are labelled, defined, and perceived by the market, with inconsistencies in verification and reporting standards across jurisdictions adding to the complexity.
Labanya Prakash Jena, consultant for sustainable finance at IEEFA, and one of the authors of the briefing note, says, “Green bond labelling is central to the credibility, transparency and effectiveness of green bonds. However, green bonds face significant challenges that can undermine their efficacy – most notably, greenwashing. The absence of robust monitoring and reporting mechanisms exacerbates greenwashing, and addressing this is important to ensure that green bonds achieve their intended purpose of financing genuinely sustainable projects.”
He also adds, “It is important to remember that the green bond market is relatively small compared to the broader bond market, limiting investment opportunities. Transparency is also an issue as obtaining clear, consistent post-issuance reports on the environmental impact of projects can deter investors.”
For developing economies like India, these challenges are even greater. Limited access to reliable data, technical expertise, and credible verification services makes it difficult to comply with the stringent reporting requirements often associated with green bonds. The costs of compliance, certification, and disclosure further add to the burden, creating barriers for smaller entities and leaving issuance largely concentrated among sovereigns and well-resourced corporates. While green bonds offer reputational advantages and attract investors committed to sustainability, the high expenses involved have created an uneven playing field.
Vandana Vuppuluri, co-author, an alumna of the Indian Institute of Management, Rohtak, mentioned, “While frameworks such as the Green Bond Principles by the International Capital Market Association and the Climate Bonds Standard have gained international recognition, their adoption and interpretation vary across markets. Inconsistent standards increase the risk of fragmented markets.”
She continued, “While green bonds are not a standalone solution for climate change, they are essential to financing a low-carbon transition. They are most impactful when paired with broader climate policies and financial strategies. Ultimately, their success depends on the interplay between market mechanisms, regulatory frameworks, and stakeholder commitment to environmental goals.”
The IEEFA note also examines the varying perspectives of different stakeholders. Issuers typically look for financial and reputational gains, investors seek sustainable returns, and market participants analyse the pricing benefits associated with the so-called green premium. However, balancing these differing objectives has proven difficult.
Moreover, recent studies indicate that the green premium—the slight cost advantage often associated with green bonds—is shrinking, now averaging between -5 and -2 basis points, and in some cases even turning negative. This raises critical questions about whether green bonds can continue to offer a competitive pricing edge, even as they remain a central instrument for financing climate-friendly projects.
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