As the world tries to move towards a sustainable future, we see many companies and government enterprises promoting investment in sectors that work in the field of sustainable development.
For example, one popular investment instrument is sectoral mutual funds. These are high risk – high return funds which can invest in shares of any sector, including green energy and environment. Another investment option on the debt spectrum which is slowly gaining eminence are green bonds.
Green bonds are essentially fixed income instruments which sponsor projects that have a positive impact on the environment. In this article, we will understand what green bonds are, the types of green bonds and how they benefit investors.
Let’s get started.
Table of Contents
What Is a Green Bond?
Green bonds are fixed-income financial instruments that are used to finance or refinance projects that contribute positively to the environment and/or climate.
With the increasing need to finance climate mitigation and adaptation activities, several government and private companies have issued green bonds to fund these projects.
These bonds have been subscribed by large institutional Investors like BlackRock, PIMCO and financial institutions and Impact funds like IFC and BII and Responsibility.
Projects that are beneficiaries of green bonds:
- Renewable energy projects in the sectors of – wind, solar and bioenergy;
- Clean transportation for general public;
- Sustainable water management including promotion of clean drinking water and water recycling;
- Energy efficient projects such as green buildings;
- Sustainable waste management projects like recycling and efficient disposal of waste;
- Sustainable land use – including sustainable forestry, agriculture and afforestation;
- Biodiversity conservation.
Types of Green Bonds
There are primarily four different types of green bonds.
1. Green Bond: Secured by assets (comparable to standard bonds)
These bonds can be compared to standard bonds, issued by companies who raise debt on the basis of their balance sheet.
Here, a general charge of fixed assets is offered as security to the investor. The end use of the money is used for projects that qualify under the green bond framework
2 .Green Revenue bond: Secured by Income-Producing Projects
These are bonds issued generally by the state, central governments or even a municipal body wherein a specific stream of cash flow such as toll receipt, excise duty, etc is provided as a collateral to investors.
3. Green Project Bonds: Secured by a Project Asset
These are bonds issued by an SPV/ project and not necessarily bonds housed under a company’s balance sheet .
Since it’s an SPV or project that issues the bonds, all assets and cash flow generated by the entity is ring fenced and available to investors as collateral.
4. Green Securitized Bond (ABS) : Secured by an Asset Pool
These are generally securities issued by clubbing several smaller eligible green projects into an SPV. The SPV then issues securities which are subscribed by investors.
The advantage of taking such a route is that investors can potentially get diversification benefits by relying on cash flows of several projects . Typically, such instruments have an element of credit enhancement
How Do Green Bonds Benefit Issuers?
We see 3 primary benefits to issuers:
1. Diversification
By issuing green bonds, one can potentially attract a new source of investor who would typically not subscribe to regular issuances of the company/sovereign
2. 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
3. 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?
We see 3 primary benefits to investors.
1. Comparable Financial Returns
From an investors point of view, one is able to achieve desirable returns while achieving environmental and social objectives
2. 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.
Tax Incentives
In most countries, green bonds attract tax incentives, thus, increasing the potential after tax yield for investors. Some Indian companies who have issued green bonds include Axis Bank, SBI, NTPC, REC, Greenko, PFC, EESL etc.
Why Should You Invest in Green Bonds?
In the 2021, the United Nations Climate Change Conference held in Glasgow Scotland, also known as COP 26, made a commitment towards mitigating climate change.
India underlined the need to start the movement, ‘LIFE’ which means ‘Lifestyle for Environment’, which urges mindful and deliberate utilization of resources.
Further to this, in November 2021, India set out the following goals:
- Reaching 500 GW of non-fossil energy-based capacity by 2030
- Ensuring atleast 50% energy requirement comes from renewable energy by 2030
- Reducing one billion tonnes of carbon emissions by 2030
- Reducing 45 % carbon intensity by 2030
- Achieving a net emission of 0, by 2070
The Aspero Advantage
Currently, most green bond issuances have a benchmark transaction size of $250 million and penetration of green bonds to mid corporates have been limited. Such transaction sizes are required to cover the attendant costs of rating, certifying and doing a road show.
For lower transaction sizes that mid corporates would want, the investor set is largely limited to Development finance institutions, multilaterals and impact funds – an investor class that Aspero has deep networks and relationships in.
If you want to explore a possibility of issuing green bonds, write to us at [email protected] and our team will be happy to assist you.
