Green bonds are a type of fixed-income instrument specifically designed to raise money for climate and environmental projects. These bonds are asset-linked and backed by the issuing entity's balance sheet, carrying the same credit rating as their other debt obligations.
Green bonds finance projects that focus on energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, clean transportation, clean water, and sustainable water management.
They also support the development of environmentally friendly technologies and the mitigation of climate change. Green bonds are sometimes referred to as climate bonds, but the terms are not always synonymous.
There is no universally recognized standard for determining the environmental friendliness of green bonds, but organizations like the Climate Bonds Initiative work to establish standards for certifying green bonds.
Green bonds provide an opportunity for investors to support sustainable projects and contribute to a more environmentally friendly economy.
How Do Green Bonds Benefit Issuers? Primary benefits to issuers:
Diversification: By issuing green bonds, one can potentially attract a new source of investors who would typically not subscribe to regular issuances of the company/sovereign.
Enhanced Reputation: Since green bond issuances undergo enhanced scrutiny and regulatory reporting requirements, a successful issuance of a green bond significantly increases the issuer’s reputation in the market.
Reduced Cost of Funds: Currently, as the market chases fewer bankable green bond projects and limited supply, strong investor demand is driving down the cost of funds.
How Do Green Bonds Benefit Investors? Primary benefits to investors:
Comparable Financial Returns: From an investor's point of view, one can achieve desirable returns while achieving environmental and social objectives.
Increased Transparency and Accountability: Since green bonds require significant regulatory reporting on an ongoing basis, there is increased transparency on the use and management of proceeds, thus becoming an additional tool to manage risk.
Green bonds in India have been growing rapidly in recent years, as the country has committed to ambitious targets for reducing greenhouse gas emissions and increasing renewable energy capacity.
India is one of the largest issuers of green bonds in the world, with a cumulative issuance of $37.3 billion as of December 20202 Some of the prominent issuers of green bonds in India are the Indian Renewable Energy Development Agency (IREDA), the State Bank of India (SBI), the Greenko Group, the Adani Green Energy, and the ReNew Power.
India plans to spend nearly 44% more on green projects via Green Bonds. This underscores the government’s efforts to accelerate the financing of clean energy projects, aimed at reducing the country’s carbon footprint and contributing to its ambitious 2070 net zero emissions.
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