Green bonds explained: How do they fund sustainable projects?

Green bonds have emerged as a cornerstone of the country’s drive towards a prudent and sustainable low-carbon economy. The focus, hence, is on mobilising vast capital resources for environmentally friendly projects.

Simply put, these bonds are debt securities specifically designed for financing activities that help in the generation of positive ecological impacts, such as renewable energy, energy efficiency, and climate-resilient infrastructure.

Hence, as the nation amplifies its commitment towards climate protection, green bonds have become an integral part of bridging the financial gap in sustainable development.

Green bonds work in a similar way to traditional bonds. Still, these bonds come with clearly established environmental mandates. The capital raised through such credit instruments must be exclusively allocated towards green projects only.

This kind of goal-based funding appeals immensely to investors prioritising Environmental, Social, and Governance (ESG) criteria, attracting domestic and global interest and capital into low-carbon ventures.

According to a Reuters report, two Indian state-run companies, NHPC and NTPC Green Energy, are aiming to raise approximately ₹45 billion (about $512.6 million). These funds are going to be raised through short-term bond issues. NHPC, a hydropower company, aims to issue two to three-year bonds valued at about ₹20 billion.

NTPC Green Energy, a subsidiary of NTPC, will make its debut in the bond market by aiming to raise ₹20 to 25 billion through five-year bonds. Furthermore, depending on investor interest, NTPC Green Energy may also consider issuing 10-year notes.

Both organisations are focusing on short-term bonds due to the currently lower rates and favourable yield spreads. NHPC recently raised ₹19.45 billion in May through long-term bonds with 6 to 15-year maturities. Going ahead, market participants anticipate short-term bond yields to ease further following the RBI's monetary policy decision that could boost demand for bonds.

Furthermore, in the month of June 2025, the Reserve Bank of India (RBI) cancelled a ₹5,000 crore 30-year sovereign green bond auction despite receiving bids exceeding ₹10,943 crore. This was attributed to yield expectations surpassing the RBI's comfort level, influenced by factors such as a weakening rupee and rising crude oil prices. This was the second instance of cancellation in the year 2025.

These cancellations are a clear sign of market volatility and a significant mismatch between the RBI's expected “greenium” and actual investor yield aspirations. Despite these ongoing difficulties and challenges, municipal green bonds continue to offer lucrative subscriptions for local green infrastructure and developmental projects.

The green bond market in the nation is set to grow steadily, supported by evolving regulations, increasing investor interest, and diversification of sustainable projects.

Efforts are focused on expanding the scope beyond energy to areas like sustainable agriculture, affordable housing, and urban development. Strengthening transparency and credibility in green bond frameworks aims to build investor confidence and support long-term climate and sustainability goals.

Disclaimer: This article is intended solely for informational purposes and should not be considered investment advice. Readers are advised to seek guidance from certified financial advisors and carry out independent research before investing in green bonds.

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