The need for saving our climate has become paramount in today’s world. Every country has started making conscious efforts towards the same in a big or small manner and has also jointly come together to achieve the common goal of saving the climate and the planet from any further damage. This has given rise to a dynamic form of investing as well which is in the form of green bonds.
These bonds have been creating quite a buzz and many countries have participated in issuing green bonds. However, what is the meaning of these bonds and how can they benefit investors and the world as a whole? Given below are the answers to these questions.
What are green bonds?
As the name suggests, green bonds are debt instruments that are issued for financing or refinancing of projects that have a positive contribution to the climate and the environment as a whole. These bonds are also known as climate bonds. The key benefit of these bonds includes tax benefits for the investors, in the form of tax breaks or tax exemptions, at the same time while creating positive infrastructure that can help in reducing the carbon footprint.
Read more: How do inflation-indexed bonds work?
How do green bonds work?
Common purposes for which green bonds are generally issued include establishing energy efficient projects, renewable energy projects, natural resources and land management projects, water management projects and waste management projects, projects leading to pollution control and prevention, etc. to attract more investment, green bonds have a higher coupon rate than the corporate government bonds that are issued with similar tenure.
Latest news on green bonds
India’s Rs 8,000-cr green bond issue auction to start on Jan 25, 2023.
Indian government is auctioning its first sovereign green bond, expecting to issue it at a lower yield than current market rates. The bond will raise funds for Rs. 400 billion ($4.92 billion) worth of green projects.
The government plans to raise Rs. 160 billion through green bonds in the current fiscal year ending March 31, with the first tranche of Rs. 80 billion set to be auctioned on Jan 25. The RBI has announced that there will be no restrictions on foreign portfolio investment for these securities. The bonds include Rs. 40 billion each of 5-year and 10-year green bonds. Currently, a 5-year 7.38% 2027 bond yield is at 7.16% and and benchmark 10-year bond yield is 7.35%.
What are the guidelines issued by SEBI relating to green bonds?
Green bonds were launched by the World Bank after the Paris Agreement in 2007 and it is estimated that by 2023, the world could see an annual issuance of up to US$1 trillion. India is the second largest emerging green bonds market after China and the first green bond in India was issued by SBI in 2018. Seeing the growing demand, SEBI has laid down many guidelines and frameworks relating to the issuance up to the reporting of the projects.
SEBI issued a concept paper in 2015 highlighting the framework or the guidelines for the issuance of green bonds and their ultimate usage and reporting. According to these guidelines, green bonds are governed by four core principles which are,
- Use of proceeds in green projects
- Transparency in the process used for project evaluation and selection
- Transparency in the management of proceeds
- Reporting of the usage of the funds and details of the projects as per the guidelines issued by SEBI
The guidelines of SEBI also state that it is not mandatory to appoint a third-party reviewer or a certifier for the evaluation of a project. The disclosure of the same is to be made only after making such an appointment. Other requirements of SEBI include the reporting of the utilization of the funds as well as the appointment of an external auditor’s verification.
What are the advantages of green bonds?
Green bonds showcase the seriousness of the organization towards its commitment to going green. Some of the key benefits of investing in green bonds are highlighted below.
- Investment in green bonds ensures the fulfillment of the green initiatives that are the dire need of the world.
- Investors get many tax benefits by investing in green bonds
- The focus on green initiatives is quite high in the current market scenario and is also quite beneficial in attracting foreign investments. This will reduce the cost of capital for the companies and benefit the nation as a whole.
- The funds invested are used for the projects under green bonds financing are for the betterment of the environment or improvement in the quality of life in general.
What are the challenges of green bonds?
Like any other investment option, investment in green bonds comes with its own set of challenges. Some of the prime challenges of investment in green bonds are stated below,
- The markets for green bonds is quite new in the Indian stock market and lacks investor awareness
- The projects up for investment through green bonds are capital-intensive and require an extensive amount of time to generate returns
- The tenure of green bonds is usually around 10 years and may not seem attractive for investors with short term or medium term investment horizons.
- There is also a general lack of credit ratings or guidelines for credit ratings in the Indian markets which may be a deterrent for investment.
Green bonds in India
Given below is a list of the top green bond issuances in India:
|Issuer||Amount||Issued Date||Tenure||Sector Exposure||Credit Rating|
|NTPC||Rs. 20bn||Aug-16||5 years||Energy||BBB (Fitch)|
|IREDA||Rs. 19.5bn||Sep-17||5 years||Energy||GB1 – green bond rating; Baa3 – issuer rating (Moody’s)|
|Yes Bank||Rs. 10bn||Feb-15||10 years||Energy||AA+ (CARE and ICRA)|
|IREDA||Rs. 7bn||Mar-17||10 years||Energy||AA+ (ICRA)|
|CLP Wind Farms||Rs. 6bn||Sep-15||3, 4 and 5 years||Energy||AA (India Rating and Research)|
|PNB Housing Finance||Rs. 5bn||Apr-16||NA||Buildings||NA|
|Hero Future Energies||Rs. 3bn||Feb-16||3 and 6 years||Energy||NA; CBI Certified|
|ReNew Power||Rs. 5bn||Aug-16||NA||Energy||A+ (CARE)|
Green bonds are the need for the day and are a good source of financing projects that are crucial for reducing our carbon footprint across the globe. The collective initiative of the governments across the world is bound to yield results but the pace of the same is still quite slow. India particularly needs huge amount of investment in green bonds approximately US$ 10 trillion to be carbon neutral which is an extremely long way to go. Nevertheless, green bonds are a step in the right direction with benefits for the investors and the planet alike.
The first green bond was issued by the World Bank in 2009.
China is the leading nation from the emerging economies in the green bond market.
India has essentially 3 types of green bonds namely, asset-backed bonds, hybrid bonds, and sovereign green bonds.
Investors with a long term investment horizon who are looking to earn a stable income through investment in debt instruments as well as hold a love for the environment and want to contribute to the betterment of the same can invest in green bonds.