The need to invest in green solutions is growing in urgency and volume. And retail investors can play a role in this and earn returns by investing in green bonds. A green bond is a major financial instrument in the capital market for financing ‘green’ projects such as setting up renewable energy capacity. It is a fixed income instrument like any traditional bond, but the difference is that the proceeds are earmarked for green projects. The issuers of green bonds are corporates, banks and financial institutions, multilateral development banks and sovereign nations. The Government of India is contemplating to issue Sovereign Green Bonds and this was indicated in the recent budget.
The issuer of a green bond does not offer a higher return than any traditional bond. However, the adjusted return of a green bond may be higher than that of a traditional bond as the credit and liquidity profile of the green bond is expected to be better. This is attributed to favorable policy and regulations and positive market sentiment. There is some evidence to suggest that green bonds are traded at a premium compared to traditional bonds—the premium, referred to as ‘greenium’, exists in the primary and secondary markets, as of 2,000 green bonds and 1.8 million in 2021. According to research studies of traditional bonds. Kristin and Alexander.
While the risk of any given bond depends on the credit profile of the issuer, some unique features of green bonds make them less risky than similar bonds. For one, since climate change is a risk, carbon-emitting regions are likely to be punished and carbon-mitigating regions—which can usually issue green bonds—incentivized. For example, if we compare bonds issued by Energy Group with interests in both conventional and renewable energy, their green bonds would be less risky, assuming everything is stable.
Second, at the portfolio level, climate change risk potentially affects the performance of portfolios exposed to carbon-emitting and polluting sectors. Green bonds provide an easy way to hedge against this risk. This is especially true in the long term as the risks of climate change will be more fully realized. Adding green bonds to the portfolio can reduce this risk over the period.
The Securities and Exchange Board of India (SEBI) has guidelines for issuance of green bonds that outline eligible areas where the proceeds can be used. Those areas include renewable energy, clean transportation, energy efficiency, water and sustainable waste management, etc. SEBI also has disclosure norms for green bonds, according to which the issuer has to make disclosures, including the use of proceeds and a list of projects. The amount of Green Bond has been allotted. Lenders also follow green bond guidelines set by the International Capital Market Association (ICMA), an international capital market development body, to ensure transparency. There are third party organizations that verify whether the proceeds are used for green projects.
Buying green bonds may seem like an easy way to do your part for climate action, but there are two issues to consider. One, a corporate can issue green bonds and use its own funds to expand its polluting business. An empirical study by the Bank of International Settlements shows that green bond labels do not provide an assurance that the issuer’s overall carbon intensity is significantly or relatively low. Second, corporates can do the ‘green washing’ by using proceeds to fund carbon-emitting or negligible carbon-reducing projects. Regulators in various countries are developing stringent green bond standards to deal with this. For example, SEBI has a green bond standard, which forces issuers in India to adhere to the set standards for labeling a bond as green.
Like any other corporate bond, a retail investor can buy these through a broker. Indian corporates also issue green bonds denominated in dollars and are listed on foreign stock exchanges such as the New York Stock Exchange and the London Stock Exchange. The minimum subscription amount varies with bonds similar to traditional bonds, and is priced around . is 10 lakhs. Green bonds issued by Indian corporates have a wide tenure- 2 to 20 years. The yield on these bonds is in the range of 6.5-10.5% in rupee terms and 5-7% in dollar terms, depending on the bond credit rating. Most are investment-grade and therefore carry low credit risk and interest rates. In India, there is no tax exemption status, only the satisfaction of doing one’s job for the planet.
Labanya Prakash Jena is a Regional Climate Finance Adviser, Commonwealth Secretariat and Doctoral Scholar at XLRI, Jamshedpur. Meera Shiva, CFA, works with early stage startups and investors. The views expressed here are personal.