“It is not an investment if it is destroying the planet.” - Dr. Vandana Shiva
We are repeatedly listening to the concerns of people, environmentalists & activists all over the world regarding the environment as they question the sustainability of different products, which continue their harmful contribution to the environment. People from different parts of the world are coming forward to protect the environment & each one of us is doing our part to contribute to a greater good that lies ahead of us.
The government was also thinking along the same lines back in 2007-2008 when the first green bond was issued by the European Investment Bank (EIB) in 2007, followed in 2008 by the World Bank. Green Bond is a new concept for most novice investors & they are unaware of the benefits which these bonds offer. But, do not worry! We have got you covered & you can look up to this article if you want to know more about Green bonds.
Let’s start by explaining what are bonds. Bonds are investment securities where an investor lends their money to a borrower (usually government or corporate), for a fixed period of time in return for regular interest payments. Bonds are sold by the companies and government to fund new projects, investments, and operations. There are different kinds of bonds available such as corporate bonds, government bonds, municipal bonds, green bonds, blue bonds, etc.
Let’s go ahead with the concept of Green Bonds and learn how they’re important for investors and play a vital role in investment.
What are Green Bonds?
A green bond is similar to a regular bond except for one point which contrasts is the former is specially earmarked in investing/financing towards environment-friendly projects such as sustainable water management, clean transportation, climate change, etc.
What are the benefits of investing in Green Bonds?
The green bonds provide a major benefit which is tax-exemption & tax credits making them more appealing to people & younger investors. These bonds give a boost to many investors as the earnings from these bonds will be directly invested in sustainable projects & it is assured that these will be used in a positive manner.
Utilization of proceeds as directed by SEBI
· Renewable and sustainable energy (wind, solar, etc.)
· Clean transportation (mass transportation)
· Sustainable water management (clean and/or drinking water, water recycling, etc)
· Climate change adaptation
· Energy efficiency (efficient and green buildings)
· Sustainable waste management (recycling, waste to energy, etc.)
· Sustainable land use (including sustainable forestry and agriculture, afforestation, etc.)
· Biodiversity conservation
This is an indicative list and may include other categories as specified by Board.
Evolution of Green Bond market in India
India marked its first milepost in February 2015 when the Yes Bank, India’s fourth-largest private bank announced to issue the first green bond as part of a program to finance 5 gigawatts (GW) worth of renewable energy projects by 2019. Followed by this event, various other institutions started issuing the Green Bonds. Here’s a table denoting the details of Green Bonds Issuance since February 2015:
Source: Climate Bonds Initiative and Punjab National Bank’s 2015-16 Annual Filings
India has been rallying and has become the second-largest market globally in green bonds with $10.3 billion worth of transactions in the first half of 2019. China secures the first position, followed by India for the green bonds market.
How to invest in Green Bonds?
Investing in green bonds is as simple as investing in stocks or mutual funds. There are various ways through which you can purchase or invest in bonds.
Bond ETFs: Bond ETFs are similar to a regular ETF. You can purchase & sell the shares of ETFs like regular stocks. ETFs usually charge lower fees which makes them more attractive to the investors.
Mutual Funds: You need to buy a mutual fund according to your goals and needs as there are a plethora of options available such as high-yield corporate bonds, long-term bonds, etc. It is advisable to choose a fund that aligns with your strategy. Mutual fund houses charge management fees & penalty fees if the invested amount is withdrawn before the maturity of the bonds.
Brokerage Accounts: Online brokerage accounts offer you the facility of buying bonds during their initial offering.
Rating a bond is a very crucial part as bonds carry the possibility of non-payment. There are chances if any bond issuer (say, Corporate or Government bond issuer) announces bankruptcy, there’s a risk they will default their debt obligations which will be a problem for investors to get their principal amount back.
Bond credit ratings help you analyze a bond and the probability if the issuer will be able to pay your principal amount back. It also helps you to look over the default risk involved in a specific bond.
There are various agencies that give ratings to individual bonds & the bank backing the bond issue. Standard and Poor’s, Fitch Ratings, and Moody’s are the top three credit rating agencies that everyone looks up to and takes into consideration.
“The higher a bond’s rating, the lower the coupon needs to be because of the lower risk of default by the issuer. The lower a bond’s ratings, the more interest an issuer has to pay investors in order to entice them to make an investment and offset higher risk.”
People are increasingly investing in Green Bonds as it is an ethical way of contributing to society with the guarantee from the regulators that your money is in safe hands. Most of the people, who don’t have much time invest their money in green bonds for a fixed return and contributing to a sustainable nature.
Let us spread this information among our fellow friends & sow the seeds of a clean and sustainable environment through financially being aware of our ethics and our duty towards nature.
NOTE: Figures of different amounts & indicative lists of proceeds are taken by Economic Times Articles & official site of SEBI respectively.