Are Green Bonds the best bet against Climate Change?

“The Earth is what we all have in common” by Wendell Berry

A Green Bond is a type of debt instrument or fixed-income instrument that is used to raise money primarily for climate and environmental projects. The purpose behind this green bond is to fund projects that have positive environmental and climate benefits. Green bonds come with tax incentives, making them a more attractive investment compared to a comparable taxable bond.

The inception of the green bond occurred in 2007 when the Intergovernmental Panel for Climate Change(United Nations agency)published a report that linked global warming and human activity. It prompted several Swedish pension funds to consider financing projects that contributed positively to the environment. Thus in 2008, the World Bank issued its first green bond.

The World Bank is the major issuer of Green Bonds and the market of green bonds is very active in the USA and India. In India, one of the most remarkable projects - the Rampur Hydropower Project has been funded by raising green bonds by the World Bank. The Rampur Hydropower project provides low-carbon hydroelectric power to northern India. 

Green bonds aim to encourage sustainability and are backed by the issuer’s balance sheet, therefore carrying the same rating as other debt obligations of the issuer. 

These bonds are mostly used to finance projects involved in Renewable energy, Pollution prevention and control, Natural resources and land management, Clean transportation, water management, and Green building. 

Types of Green Bonds

Green Bonds were created with a single mindset to have a positive impact on the environment and the proceeds from these bonds are assigned for green projects. 

Use of proceeds revenue bond- the revenue generated by these bonds is used only for green projects or finance sustainable development projects.

Project Bond- These types of bonds are secured by the assets of the project. The intention behind such projects is to find out a way to contribute to the world through investments.

Securitization ABS bond- This bond is raised to refinance the green project portfolios(group of green projects)

Covered Bonds- These bonds are backed or covered by a pool of assets This means if the issuer goes bankrupt then the covered bond buyers are paid interest on their issued bonds through the sale of other securities of the issuer. The covered bonds buyers get the priority in repayment.

Benefits of green bonds:

Alongside the green angle which attracts investors who want to contribute to fighting climate change, green bonds come with a variety of benefits like tax exemption, low cost of capital for projects and more. Let’s take a deeper look at several benefits of green bonds. 

Access to capital for sustainable projects- Such projects lead to environmental and economic benefits and thus have a positive impact on the investors which makes investing in such projects attractive thus making access to capital easy. Higher demand for green bonds equals lower costs to borrow money. The lower cost would mean reduced spending for a business. These savings are either passed down to the bondholder in the form of a dividend or are used to lower the costs of funds.

Tax Exemption- Issuers get the benefit of tax incentives such as tax exemption and tax credits which aids to reduce the taxable income.

Enable the projects at a lower cost of capital- Green bonds turn out an excellent way to secure large amounts of capital to support environmental investments that may not otherwise be available. Green bonds are well suited for large-scale sustainability projects such as wind and solar development, which often require capital investment ahead of revenues

Leadership and branding opportunity- This gives an opportunity to the organization to convey your identity and distinctiveness as a leader in the market

Considering the current economic and climatic conditions persisting in not just our country but the world, adopting financing strategies such as these are the need of the hour. India has the second-largest bond market in the developing world, which means with the government’s constant endeavor on climate change and the growing awareness amongst the general public, India is well-positioned to witness a sharp growth in sustainable financing going ahead.