Green bonds are financial instruments that are designed to fund environmentally sustainable projects. These bonds are similar to traditional bonds in that they are debt securities issued by companies, governments, or other entities to raise capital. However, the key difference is that green bonds are specifically used to finance projects that have positive environmental benefits, such as renewable energy, clean transportation, sustainable agriculture, and waste management.

Investors who purchase green bonds benefit from the traditional features of a bond, such as fixed income, predictable cash flows, and capital preservation. However, they also benefit from the knowledge that their investment is contributing to positive environmental outcomes, which can be attractive to socially responsible investors. Green bonds can be purchased by a range of investors, including institutional investors, retail investors, and even governments. The proceeds from the green bond must be independently verified as meeting certain environmental standards, such as those set by the Climate Bonds Initiative or the Green Bond Principles.

There are no uniformly defined norms for the issuance of green bonds but they follow four important steps

1. Preparation: The bond issuer provides a complete overview including the decision-making process, eligibility criteria for the project and asset selection. This will be an information prospectus for the potential investors.
2. Use of Proceeds: The proceeds of the fund are to be used for green projects and assets. It is important that it should aligned be with the Green Bond Principles or Climate Bond Taxonomy. Selection of projects and assets on the basis of internal governance mechanisms. The selection process must be transparent to ensure the investors are aware of the robust internal processes.
3. External Review: Assessment by an external auditor of the green credentials is in the form of second party opinion. Independent reviews often accompany the prospectus and is shared with potential investors.
4. Post-Issuance Audit- Audit of the use of proceeds to ensure that they are adhering to the principles and continue to keep invested in eligible projects is undertaken periodically.

The increase in the issuance of green bonds reflects the willingness to showcase environment-friendly and conservation initiatives to combat global warming. Many countries like Brazil, India, Japan and Morocco are already developing their own guidelines and regulatory systems.

The emergence of green bonds goes back to the 2007 Intergovernmental Panel on Climate Change report that connects human action to global warming. To ensure investment for sustainability with positive environmental outcomes, a set of eligibility criteria was determined. The first green bonds were issued by the European Investment Bank and World Bank in 2007.

This formed the framework for the green bond market where criteria for issuance, reporting and other review systems were established with the support of agencies like CICERO. The International Capital Markets Association established the Green Bond Principles to further develop transparent guidelines for investors to support climate solutions.

The Government of India issued Sovereign Green Bond has sold its first sovereign green bonds worth ₹8,000 crore.

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