If the financial wagon has taken off in the world, India isn’t too far behind in that journey. A relatively new financial trend taking shape worldwide is the ‘Green Bond.’ So, what are ‘Green Bonds,’ and why are they being issued by Indian companies? Let’s learn all about it.
In definition, Green Bonds are fixed-income financial instruments similar to traditional bonds. They differ from traditional bonds in that they are specifically designed to raise capital for projects with positive environmental and climate benefits—initiatives like renewable energy, clean transportation, and sustainable water management. Key features include accountability, transparency, and tax benefits.
The 3 Main Aspects of Green Bonds
- Purpose – This is to finance or refinance projects that contribute to a sustainable, low-carbon economy.
- Issuer – Governments, municipalities, and corporations issue these bonds to fund initiatives like solar parks, metro systems, and green buildings.
- Structure – They are like conventional bonds, but with a dedicated use of proceeds for eco-friendly purposes.
Green Bonds are beneficial for issuers, investors, and for transparency. They often come with strict reporting requirements, ensuring funds are issued as intended.
India, not unlike most other financial sectors, is rapidly growing in the use of specialized debt instruments by companies to raise capital for eco-friendly projects. Projects like renewable energy, sustainable transportation, and water management are all part of it. This is the reason behind the rapid growth of Green Bonds in India. They offer competitive, tax-beneficial returns, usually between 8% to 14%, while also supporting India’s transition to a low-carbon economy. Banks and corporations such as YES Bank, ReNew Power, and NTPC are the biggest issuers in this regard.
Key aspects of Indian Green Bonds
- Purpose – Green Bonds are exclusively used to finance or refinance projects with positive environmental or climate impacts.
- Market Status – As of March 2023, India has issued nearly USD 21 billion in Green Bonds. It accounts for 3.8% of total outstanding domestic corporate bonds.
- Growth Drivers – There is a strong investor demand for ESG (Environmental, Social, and Governance) investments and a push for sustainable infrastructure.
- Greenium – One of the recurring trends of Green Bonds is when investors accept lower yields (higher price) on green bonds, as compared to identical conventional bonds.
- Regulations – The Green Bonds are regulated by the Securities and Exchange Board of India (SEBI) to prevent ‘Greenwashing,’ and ensure funds are used for intended green projects.
Green Bonds also offer India certain benefits, some of which are as follows:
- Investor Benefits – The returns are competitive (8-14%), transparency is high, and it serves as a chance to contribute to environmental goals.
- Issuer Benefits – It provides access to a dedicated pool of capital, potentially lower borrowing costs, and improved corporate reputation.
- Key Sectors – The majority of the funds go directly towards renewable energy, such as Solar and Wind.
- Future Outlook – India has committed to climate targets, and is expected to expand its market based on that. It introduced Sovereign Green Bonds, which help set a benchmark for corporate users.
India still has a few challenges when it comes to Green Bonds:
- Market Maturity – Green Bonds in India is still at an initial stage, as compared to the global stage. As of 2023, it represented only 2.2% of the global issuances.
- High Costs – High currency hedging costs and a lack of awareness can affect growth negatively.
- Definition Standards – As of now, the definition of “Green” projects is very loose, and it gets taken advantage of. There is a need for a more consistent, rigorous, and internationally aligned definition for it.
