Everything you need to know about Green Bond

Green bond gives you an opportunity to invest your money in preserving nature and mitigating climate change.

And

In return, you get a fixed income on your invested amount.

Hence, a green bond is a debt instrument with a fixed income to its buyer.

Or

It is a kind of debt security used to fund environmentally friendly projects.

Governments, Corporates, and banks can issue these bonds.

Why Green Bond?

Climate change is affecting all of us.

We are witnessing changes in weather patterns, frequent floods, severe droughts, the melting of glaciers, and a rise in sea levels.

This is leading to diseases, hunger, poverty, and the migration of animals, birds, and humans.

Our food security, clean water supply, and animal and plant species are at risk.

Now, tackling this eminent natural, social, and economic disaster.

We must come forward and cooperate in whatever means we could.

And

Investing in green bonds is one of those innovative options available to us.

Green bonds raise funds from investors who support green ideology.

And this collective fund is further invested in those promising projects that seek to mitigate climate change and help preserve the environment.

Fact: 
Since 2008, World Bank has issued over $ 18 billion in green bonds through over 200 bonds in 15 different currencies.

We can say that green bonds finance projects that help mitigate carbon emissions, improve energy efficiency, support clean transportation, protect plants and animals, sustainable water management, and preserve natural resources.

Within the above projects mentioned, there are 2 broad categorizations for a project to be called a green project.

Mitigation Projects

It refers to those innovative technologies that mitigate climate change such as investments in renewable energy projects like solar and wind.

These clean technologies do not pollute the environment while producing current.

Are you looking for solar power installations and uncertain about its sizing and the kind of return it will offer in its lifetime?

They try my solar feasibility spreadsheet.

It will guide you in getting things done in an effective and efficient manner.

Adaptation Projects

It refers to the changes in the present processes and the practices to slow down the potential damage to the environment.

For example, if both LED and bulb are powered by fossil fuel then LED consumes less energy than a bulb to provide the same intensity of light.

Hence, LED consumes less fossil fuel energy. Hence the potential damage to the environment is much slower than that by the bulb.

History of Green Bond

In 2008, the world bank issued the first green bond, enabling investors to get fixed income by investing in green or climate-supporting projects.

Since this issuance, the green bond market is increasing considerably.

Today, over 50 countries have issued green bonds.

And it is expected that the market of green bonds would exceed $ 1 trillion by 2023.

A recent example of Green Bond in India

Recently RBI issued worth Rs. 8,000 crores of sovereign green bonds (January)

And the second tranche of another Rs. 8,000 crores in February 2023.

(Sovereign green bonds: Government issues these bonds and money is raised to fund green projects and to reduce the carbon intensity in the environment).

With a yield of 7.1% (5-year bond maturity 2028) and 7.29% (10-year bond maturity 2033).

5% of the total bond will be available to retail investors.

This green strategy is in view of the commitment made by India in Glasglow in November 2021.

It highlights the 5 nectar elements (Panchamrit) on India’s climate change action:

1. To reach 500 GW non-fossil fuel energy capacity by 2030
2. To meet 50% of its energy requirements from renewable energy by 2030
3. To reduce total projected carbon emissions by 1 million tonnes from now to 2030
4. Reduce the carbon intensity of the economy by 45% by 2030, over 2005 levels
5. Achieve net zero emissions by 2070.

In 2022-23, funds from sovereign green bonds will be issued for mobilizing the resources for green projects.

Types of Green Projects

• Renewable Energy projects: Solar, Wind, Hydropower
• Energy Efficiency: Design and construction of energy-efficient, energy savings systems, and installations
• Clean transport:
• Climate change adaptation:
• Sustainable water and waste management
• Pollution prevention and control
• Green buildings
• Sustainable management of living natural resources and land use
• Terrestrial and aquatic biodiversity conservation

Top Green Bond in India

1. NTPC

• Green Masala Bonds issued on August 2016
• Raised amount: Rs. 2,000 crores
• Annual Yield: 7.48%
• Tenure: 5 years

2. PNB Housing Finance

Amount of  Rs. 500 crores raised from IFC in April 2016 (a member of the World Bank Group) for investment in constructing green residential buildings.

3. Hero Future Energies (Renewable Energy arm of Hero group)

With a coupon rate of 4.25% and a maturity period of 6 years.

4. ReNew Power

Raised $ 400 million at 4.5% with a tenure of 5.25 years.

5. IREDA (Indian Renewable Energy Development Agency)

Raised Rs. 700 crores in 2017 to fund Solar and Wind projects.

Basics of Bond

Yield is a general term and gives you the return on your invested money in a green bond.

Two basic yields to know.

Coupon Yield

The annual interest that the issuer pays to the buyer.

It is the rate based on a percentage of its face value.

(This rate is decided at the time of issuance of the bond and does not change throughout the bond’s life).

For example, a Rs. 100 bond (issue price) with a 6% coupon yield will pay you Rs. 6 annually as interest.

Current Yield

The current Yield checks the coupon rate to the current market price.

The market price of the bond fluctuates.

Therefore, a Rs. 100 bond may trade at Rs. 105 or at Rs. 95.

When it is at Rs. 105, the current yield comes out:

Rs. 6/Rs. 105 x 100%

= 5.71%

When a bond is trading at a higher value than the issue price, the current yield decreases.

And

When it is at Rs. 95, the current yield is:

Rs.6/Rs. 95 x 100%

= 6.3%

when the price goes down from the issue price, the current yield increases.

(The interest money is always fixed (Rs. 6) which is the certain percentage (6%) of the issue price (Rs 100).

The buyer will get Rs. 6 as annual interest whether the bond price goes up or comes down.

It is the current yield that gets affected due to the bind price fluctuation).

Conclusion

Investors who have a long-term horizon, want stable income, and have an interest in preserving the environment can invest in green bonds.

You can claim tax exemptions on your investment in green bonds.

Also, adding green bonds to your existing portfolio is a great way of diversifying your asset classes. (Bonds give stable returns and low-risk instruments).

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