What Is a Green Bond?
Green bonds are fixed-income financial instruments that are used to finance or refinance projects that contribute positively to the environment and/or climate.
With the increasing need to finance climate mitigation and adaptation activities, several government and private companies have issued green bonds to fund these projects.
These bonds have been subscribed by large institutional Investors like BlackRock, PIMCO and financial institutions and Impact funds like IFC and BII and Responsibility.
Types of Green Bonds
There are primarily four different types of green bonds.
1. Green Bond: Secured by assets (comparable to standard bonds)
These bonds can be compared to standard bonds, issued by companies who raise debt on the basis of their balance sheet.
Here, a general charge of fixed assets is offered as security to the investor. The end use of the money is used for projects that qualify under the green bond framework
2 .Green Revenue bond: Secured by Income-Producing Projects
These are bonds issued generally by the state, central governments or even a municipal body wherein a specific stream of cash flow such as toll receipt, excise duty, etc is provided as a collateral to investors.
3. Green Project Bonds: Secured by a Project Asset
These are bonds issued by an SPV/ project and not necessarily bonds housed under a company’s balance sheet .
Since it’s an SPV or project that issues the bonds, all assets and cash flow generated by the entity is ring fenced and available to investors as collateral.
4. Green Securitized Bond (ABS) : Secured by an Asset Pool
These are generally securities issued by clubbing several smaller eligible green projects into an SPV. The SPV then issues securities which are subscribed by investors.
The advantage of taking such a route is that investors can potentially get diversification benefits by relying on cash flows of several projects . Typically, such instruments have an element of credit enhancement
How Do Green Bonds Benefit Issuers?
We see 3 primary benefits to issuers:
1. Diversification
By issuing green bonds, one can potentially attract a new source of investor who would typically not subscribe to regular issuances of the company/sovereign
2. Enhanced Reputation
Since green bond issuances undergo enhanced scrutiny and regulatory reporting requirements, a successful issuance of a green bond significantly increases the issuer’s reputation in the market
Frequently Asked Questions
What are the key takeaways from this article?
Green bonds are fixed-income financial instruments that are used to finance or refinance projects that contribute positively to the environment and/or climate.
Who should read this article?
This article is designed for retail investors, first-time bond buyers, and anyone looking to understand fixed income investments in India.
How does this relate to my investment portfolio?
Understanding these concepts helps you make informed decisions about asset allocation and build a diversified investment portfolio.
