As the world celebrates World Environment Day on June 5, 2023, let us explore the advantages, risks and rewards of green bonds and why are they considered environmentally sustainable?
Green bonds enable governments and corporates to finance initiatives to tackle air and water pollution, deforestation, drought, etc., that contribute to climate change.
Likewise, it offers investors an opportunity to participate in these projects. Green bonds finance initiatives to reduce environmental degradation, including carbonization of the atmosphere.
What Are Sovereign Green Bonds?
In the Union Budget 2022-23, the government announced the issuance of sovereign green bonds, or Reserve Bank of India (RBI) climate bonds, to mobilise resources for green infrastructure.
The first tranche of these green bonds was issued in February, with a 7.10 per cent yield for 5-year tenure, paid half-yearly, and annually. The principal amount is repayable in 2028.
For a 10-year green bond, the yield is 7.29 percent, with the principal amount repayable in 2033. The interest rate and the duration are almost similar to other government bonds.
The second tranche of these bonds will likely come in the second half of the fiscal 2023-24.
Companies also issue green bonds with a maturity period of two to 20 years. Corporate green bonds may give better returns but they come with greater risks.
Rewards and Risks
Since the government backs the sovereign green bonds, they have zero credit or default risks. Additionally, these bonds have less project-related risks as the repayment of principal and interest amounts aren’t tied to project performance or completion.
Green bonds generally offer comparable returns to conventional bonds but can potentially give higher adjusted returns amid favourable market sentiments, regulations, and policies.
The unique attributes of green bonds, such as reduced risk in carbon-intensive sectors, make them an attractive investment option for risk-conscious investors.
However, in the case of corporate green bonds, investors must ensure that the fund is not a deceptive “greenwashing” concept, where the greenwashing corporates use the proceeds for carbon-emitting or negligible carbon-reducing projects. Therefore, a thorough review of the bond’s prospectus is crucial to understanding the specific projects it supports and their expected environmental impact.
Nevertheless, to tackle this issue, the Securities and Exchange Board of India (Sebi) has established guidelines outlining eligible sectors for green bond proceeds, including renewable energy, clean transportation, energy efficiency, and sustainable waste management. These guidelines ensure transparency and accountability by requiring issuers to disclose the use of funds and project allocation. Despite the lack of tax benefits, green bonds offer an opportunity to environmentally conscious investors keen on sustainable investments.
Other Green Investing Opportunities
To address climate change, banks and non-banking financial companies (NBFCs) have also launched green deposits to finance green projects for energy, transport, buildings, etc. In this regard, RBI has recently issued fresh guidelines.
RBI's green deposit framework, effective June 1, aims to encourage regulated entities (REs) to offer green deposit options to customers while ensuring the protection of their interests. It emphasises the importance of sustainability and addressing concerns related to greenwashing.
Green deposits are financial products that enable individuals and organisations to deposit their funds with banks and NBFCs to finance environmental-friendly activities. These deposits mobilise resources for sustainable initiatives, thereby opening up the financial sector to actively contribute to reducing carbon emissions and other sustainable projects.
Furthermore, green deposits cater to diverse needs of depositors. Some common green deposit avenues include fixed deposits, savings deposits, recurring deposits, and certificate of deposits, offering different benefits to individuals and organisations based on their investment goals.