In recent years, the conversation around global warming and climate change has taken centre stage, and for crucial reasons. In their interaction with this conversation, businesses and governments have sought to address the shortcomings of the prevalent system through a shift to environment-friendly solutions to the needs of the environment and the populations they cater to. And thus, we have observed a marked shift towards sustainable options like electric vehicles, paperless businesses, infrastructural projects pertaining to solar use and the like. While the jury is still out on the actual impact of these changes, it is certain that they have significantly impacted policy designs curated by governments and corporations alike. Importantly, since a number of these initiatives demand large scale alterations in the production process, governments and corporations have sought to facilitate the influx of funds required for the same through a number of financial instruments - like green bonds.
The idea behind such an initiative is to incentivize investors, corporations and governments to shift towards options that purportedly promote sustainable living and environmental well-being, without compromising on macroeconomic growth, company performances and profit margins and the investors’ financial health.
Background
While the first green bond was issued by the World Bank in 2008, their proliferation in India was observed only since the second half of the last decade. Fast forward to 2023, green bond issuances in India have crossed the $21 billion mark, with the private sector contributing towards 84% of these issuances. The employment of green bonds to fund multiple wind power, hydro power and solar power projects by Greenko Group, the largest bond issuer in India, is a notable example in this respect.
While private players, as mentioned, dominate issuances pertaining to green bonds at present, recent policy decisions imply that the government’s interest in entering the segment. In 2021, a local civic body in Ghaziabad became the first government body to issue a green bond worth $20 million, thereby marking the state’s foray into the sub-sector. Later, in January 2023, the government issued sovereign green bonds worth $980 million, thereby reaffirming its engagement with the medium.
What You Should Know
From how much is known, at present, it is ideal to consider the following factors before making up your mind regarding green bonds:
Diversification & Risk Mitigation
Since investing in green bonds allows us to add yet another investment type to your portfolio, it lucidly aids the investors’ pursuit of diversifying our finances. In doing so, it helps investors in mitigating their risk profiles and in providing a healthy cover for high-risk short term engagements with long-term investment options. Thus, without any prejudice to other determinants, green bonds inadvertently adhere to the principle of diversification with an eye on the future.
Environmental Impact & Regulatory Infrastructure
Because environment-friendly initiatives are overseen with keen interest by the government, investors are expected to lend a reasonable quotient of trust in these initiatives. At the same time, the promise that bulwarks the sale of these bonds is that the said initiatives shall positively impact the environment at large, without impacting the financial well-being of individual investors. However, in this respect, the lack of a regulatory framework to supervise the creditworthiness of the organisations in question proves to be an impediment among investors to give in to the trend.
The Present & The Future
As already mentioned, recent initiatives have pointed towards a marked growth of green bonds in the market. Additionally, the increasing demand for sustainable options is also likely to further incentivize corporations to facilitate the growth of green bonds. Thus, the scope and potential for further growth also remains positive. However, while accepting such a likelihood, it is also important to gauge the choices investors are left with to choose from in the present day. In this regard, the primary shortcoming pertains to the limited supply of green projects at present, thereby pointing towards the non-abundance of opportunities for investors to invest in green bonds.
Other Gains & Losses
It is generally accepted that the cost of issuance affiliated with green bonds is comparatively higher, especially for small investors. Regardless, however, the option of investing in baskets of green bonds remains available to the investor base.
Besides this, the shift towards green bonds is further incentivized through tax exemptions on select products, thereby unburdening the investors from financial obligations that would otherwise be mandatory.
Conclusion
Summarising everything, as must be apparent, the prevalence of a spike in favour of green bonds, among issuers and investors alike, is hard to miss. At the same time, it is also important to acknowledge that the journey of green bonds in India is still at a nascent stage.
Considering the realities that persist, thus, it is vital for bond investors to weigh the available options pertaining to green bonds carefully before arriving at a firm conclusion.
Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.