What are Green Bonds? How Are They beneficial?

Bond is a type of debt instrument where the entity issues them in order to raise funds from investors.

A green bond is very similar to any other bond issued by an entity for raising funds from investors.

However, the only difference lies is that the green bond offering are only issued for use towards financing 'green' projects.

The main difference between a 'green' bond and a regular bond is that the issuer is raising capital to fund 'green' projects, assets or business activities with an environmental benefit, such as renewable energy, low carbon transport etc.

Background

Green bonds issuance started in the year 2007 and in the early years these bonds were a niche product, pioneered by a handful of development banks.

With growing market appetite for such bonds there is an increasing number of issuers and investors participating in Green Bonds. In the year, 2013, corporate sector showed interest, which substantially increased in the year 2014.

In India, entities like Yes Bank, CLP India and Exim Bank came out with green bonds in 2015. Recently, Yes Bank came out with another issue of Green Bonds in August 2015, which was a Rs 315 crore 10-year issue. The entire issue was subscribed by the International Finance Corporation.

However, as of now there is no standard definition of green bonds.

Where does green bonds invest?

Entities to get status of green bonds, the money should be invested may be one or more of the following:

• 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

How Are Green Bonds beneficial?

The key benefits of issuing green bonds are as under:

Green bonds can help in enhancing an issuer's reputation, as this is an effective way for an issuer to demonstrate its green credentials.

• Issuing green bonds show the issuers commitment towards the development and sustainability of the environment. Further, this may also generate some positive publicity for the issuer.
• There are a specific global pool of capital, which are earmarked towards investment in Green Ventures.
• Many investors globally focuses primarily on environmental, social and governance (ESG) related aspects of the projects in which they intend to invest. Green bonds help an issuer the access to such investors which they otherwise may not be able to tap with a regular bond.
• The green bond issuance attracts wider investor base and this may in turn benefit the issuers in terms of better pricing of their bonds vis-a-vis a regular bond.

With increasing focus of the global investor community towards green investments, it is expected that new set of investors will enter into this space leading to lowering the cost of funding for green projects.

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