Green Bonds on Fire: Indian Bond Market Leading the Way as the Hottest Option
According to a CNBC TV 18 article published in September 2023, the Indian government plans to issue Rs. 20,000 crore Sovereign Green Bonds in the second half of FY24! With sustainability becoming more important than ever, the Indian government’s efforts in promoting environmental projects through sovereign green bonds are appreciable. It showcases the country’s urge to contribute significantly towards global sustainability and emerge as a leader in this space. If you’ve been looking to invest in bonds, you may consider investing in green bonds. But what are green bonds and how can they benefit everyone? Let’s look at these aspects in this blog.
What is a Green Bond and its Purpose?
A green bond is a fixed-income instrument issued to fund climate and environmental projects. Hence, green bonds are also termed climate bonds. Usually, these bonds are asset-linked and it is the issuer’s balance sheet that backs it. Accordingly, green bonds have a credit rating equivalent to the issuer’s other debt obligations.
Now, what is the purpose of green bonds? With increasing emphasis on sustainability, governments worldwide are obliged to make positive and measurable efforts towards environmental conservation. Of course, these projects demand massive sums of money should the government plan them to implement at a national scale. Green bonds aim to serve the financial needs of such initiatives and promote sustainability worldwide.
Some specific projects for which green bonds intend to raise money include sustainable agriculture, pollution prevention, forestry, fishery, clean transportation, sustainable water management, clean water and more. In addition, these bonds also aim to fund projects that involve developing green technologies and mitigating climate deterioration.
Benefits of Investing in Green Bonds
Green bonds benefit issuers and investors
in numerous ways. Let’s look at the advantages of green bonds for both.
For Issuers
Issuers gain various
commercial, strategic and reputation advantages via green bonds. Here are some
of the most significant ones.
Broadened Investor Base Access
Given the increasing number of environment-conscious investors, green bonds can appeal to investors with a significant emphasis on ESG. It can help increase the demand for the issuer’s debt securities and reduce the issuer’s borrowing costs.
Funding Source Diversification
Issuers can diversify their funding sources by
leveraging investments from a broader and different pool of investors. It can
help reduce the issuer’s dependence on conventional funding sources and pave
the way to better financial health in the long run.
Optimistic Environmental Impact
Accomplishing sustainability goals is key to the planet’s well-being and future. Green bonds fund projects that aim to make the planet greener through various innovations. Thus, with these bonds and the money raised through them, the country can contribute better to reducing carbon emissions and building a climate-resilient economy.
Increased Transparency
Green bonds usually require issuers to give comprehensive insights into their project selection, proceeds and environmental impact. Such transparency can contribute to increased investor trust and confidence in the issuing organization.
Improved Brand Value and Reputation
Investors and the world overall value companies, corporations and governments concerned about environmental conservation and sustainability. Issuing green bonds signifies a company’s efforts. It can improve an organization’s reputation, and brand value, show its commitment to sustainability and thus increase investor confidence.
For Investors
Here’s how investors
benefit from green bonds.
Reduced Stranded Asset Risk
Stranded assets are investments that may turn redundant or non-performance owing to regulatory changes, changed market preferences or technology disruptions. Green bonds finance projects aligned with current and future climate policies. Such an approach can help prevent the stranding of assets.
Portfolio Diversification
Another crucial benefit of green bonds is that they can help investors diversify their fixed-income portfolios and spread risk across numerous sectors and sustainability-related projects. The result is a more balanced investment portfolio.
Types of Green Bonds
Here are some types of
green bonds you may invest in based on their availability.
Project Bonds: These bonds are confined to a specific green project. It means investors have recourse only to assets concerned with the project.
Securitization Bonds: These comprise various projects bundled into a single debt portfolio. In these bonds, bondholders have recourse to the assets underlying the full set of projects.
“Use of Proceeds” Bonds: They provide lenders recourse to the issuer’s other assets during liquidation. Their credit rating is the same as the issuer’s other bonds.
Covered Bonds: These bonds fund a group of green projects called the “covered pool.” Investors have recourse to the issuer. However, if the issuer cannot make debt payments, then bondholders get recourse to the covered pool.
“Use of Proceeds” Revenue Bonds: They may finance or refinance green projects. However, the collateral for the debt is sourced from the various streams of revenue like taxes or fees that the issuer collects.
What are Sovereign Green Bonds?
Sovereign green bonds are financial instruments that governments raise to fund environmentally friendly and sustainable projects. These bonds are part of the wider green finance movement that aims to support initiatives with a positive environmental impact. When a government issues sovereign green bonds, the funds it raises through such projects aim to finance renewable energy infrastructure, environmental conservation or sustainable transportation. Thus, the holders of such bonds essentially support the government's efforts to address and promote sustainability.
India is making noteworthy progress across this realm. According to a World Bank article, on January 25, 2023, India issued the first tranche of its first sovereign green bond with Rs. 80 billion! These bonds show India’s commitment to expanding renewable energy production and reducing its carbon intensity by supporting expenditures for renewable energy and transport electrification.
Investments in these sectors matter as they signify nearly 41% of India’s GHG emissions in 2019. They also are expected to account for two-thirds of emissions by 2050.
Green bonds dedicated to renewable energy will help promote renewable energy technologies like solar power, wind and small hydro. In addition, they will support research and development of tidal energy. Resources generated through these bonds will support India’s sustainability journey.
Green Bonds to Constitute 8-10 Per Cent of India’s Corporate Bond Issuances!
According to an Economic Times article, India’s increasing capital needs for the next zero 2050 scenario are 11 per cent of the GDP, nearly 3.5 per cent more than the global average. Even for the short-term 2030 target, the projected investment remains around USD 110 billion. Meeting these investment needs requires India to tap into growing global capital reservoirs like global pensions, private equity and infrastructure funds.
Although the collective value of green bonds issued since 2018 remains a tiny fraction of the total bond market, India’s performance is better than numerous advanced and emerging economies. Dinesh Kumar Khara, Chairman, State Bank of India (SBI) has predicted that green bonds in India are set to account for 8-10 per cent of the overall corporate bond issuance in the upcoming years.
India Leading the Asian Emerging Markets in Green Bond Issuance
Green bonds aren’t new to the Indian market. Government agencies and financial institutions have been using them since 2015. As of February 2023, Indian green bond issuances have reached USD 21 billion. The private sector accounted for 84 per cent of the total green bond issuances.
Indian issuers have surpassed many emerging Asian markets, excluding China, with regards to green bonds. The entry of the Indian government into the green bond space can lead to more investments in green and climate-friendly projects, helping India foster more inclusive, green and resilient development.
Currently Available Green Bonds in India
Here are some green bonds as listed on SEBI’s website and as of December 31, 2023.
Indian Renewable Energy Development Agency Limited
· Date of Issuance: 03/01/2019
· Date of Maturity: 03/01/2029
· Amount: Rs. 275 crores
· Coupon: 8.51 per cent
· Tenure: 10.01
· ISINs: INE202E07260
Indian Renewable
Energy Development Agency Limited
· Date of Issuance: 17/01/2019
· Date of Maturity: 17/01/2029
· Amount: Rs. 590 crores
· Coupon: 8.47 per cent
· Tenure: 10.01
· ISINs: INE202E07278
Yarrow Infrastructure Private Limited
· Date of Issuance: 01/07/2021
· Date of Maturity: 01/07/2024
· Amount: Rs. 581 crores
· Coupon: 6.49 per cent
· Tenure: 3
· ISINs: INE001W07011
Clean Sustainable Energy Private Limited
· Date of Issuance: 28/02/2022
· Date of Maturity: 28/02/2025
· Amount: Rs. 334 crores
· Coupon: 6.75 per cent
· Tenure: 3
· ISINs: INE00JT07017
Mindspace Business Parks REIT
· Date of Issuance: 15/03/2023
· Date of Maturity: 13/04/2026
· Amount: Rs. 550 crores
· Coupon: 8.02% per cent
· Tenure: 3.09
· ISINs: INE0CCU07074
Note: The above green bonds are for information purposes. Altifi doesn’t promote them in any way. Investors are advised to check the bond details thoroughly before investing. (Source: SEBI)
Final Words
Green bonds serve many purposes. While helping governments and corporates raise funds for environmental projects, they promote sustainability, help investors diversify their investment portfolio and enable them to contribute their bit to sustainability. Connect with Altifi if you are looking to invest in bonds. Click to sign up with us and unlock various bond options.
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.