💵 All about Sovereign Green Bonds' India Debut

India is all set to launch sovereign green bonds. Here's why.

Attention Investors! There's a new investment that's opening up soon for you:

Sovereign Green Bonds. 

And as usual we're here to decode this investment asset for you! 

So, sit tight and ReadOn! 

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🤓 Understanding Sovereign Green Bonds

If you remember this year's Budget Session then you were already aware that these Green bonds were debuting soon. 

The government had announced that it is planning on issuing green bonds worth at least Rs. 240 billion soon. 

But what are sovereign green bonds? 

They are like regular bonds, a way for the government to raise money. But the funds raised through these bonds are used to fund green energy or other eco-friendly projects only. 

Yes, they're very specific. But why is India opting for these specific bonds? Why not raise debt the normal way? 

Because sovereign green bonds are a cheaper way to raise funds. Huh? 

Yes, companies or countries issuing these bonds usually price them at a higher price than conventional bonds (mainly because certifying green bonds is also costly). 

And the interest rates on these bonds are also lower. 

So, bond issuers get more money for less interest rate. 

For instance, the interest rate for a three-year UK green bond is 3%*. So, if you invested £1,000 in these bonds you would get £1,090 at the end of three years (bonds pay a simple interest).   

But the interest rate on a regular 3-year bond is 3.172%*, which means by investing the same amount for the same period you would get 1,095.16. That may seem like a small difference right now because we've taken a small ticket size. But bond ticket sizes are usually very high, around Rs. 10,00,000, so the difference is a lot.

Wait, then why would anyone go for these green bonds? 

Well, because these bonds are a way to ensure and protect our future. They raise money for green energy projects, for better water supply, for decarbonising the environment and so on: they aim to keep our little blue planet blue for a little longer. 

And this sentiment is fast gaining steam among investors. A lot of investors no longer just want to invest to grow their money, they also want to invest to create a better future for us all. 

Plus, there are other benefits. Investing in these funds helps a lot of companies meet their ESG goals. And in a lot of countries the earnings from these bonds are tax-free. 

Thanks to all of this, there is a huge demand for green bonds. In fact, a lot of these bonds are oversubscribed by 8-12 times. 

These factors have made green bonds a really popular way of raising funds. More than 25 countries currently raise debt through green bonds. And that's just countries. 

So many companies worldwide, including Indian companies like the Adani Group, have raised funds through green bonds. 

Even the Ghaziabad Nagar Nigam launched these bonds to raise money for a water treatment facility. 

So, what took India so long to launch these bonds? Do we not like cheap money? 

Well, if getting cheap money was so easy no one would be poor. 

Green bonds sound great but they take quite a lot of effort. Especially when you are an emerging market country looking to woo major international investors. 

To get these investors, India will first have to get the recommended certifications for green bonds. Plus, we will also have to develop eligibility criteria according to ICMA Green Bond Principles. 

What's more, we will have to make it clear to investors that these funds will be used only for green projects. 

Achieving all of this takes time and effort, but it could get us a lot of cheap money which will help us defeat climate change. 

But India is entering the bond markets at a risky time. Interest rates are high right now due to constant hikes by the US Federal Reserve, which could raise our costs of borrowing even with green funds. And while this may help bring more investors to the bond market, the falling rupee may scare away foreign investors. Because with the rupee constantly declining their investment will lose value rather than gain. 

So, are sovereign green bonds a good investment? 

Well, this can be a potentially risky investment for retail investors due to the high ticket size and low yield. But you could get some exposure to them through ESG funds that invest in green bonds as this could help you diversify your portfolio. Also, you can sell most green bonds before their maturity period. These bonds are usually in high demand, so trading them is easy but you do lose some money if you sell them before they mature.

P.S. This is not investment advice. 

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*As on November 3, 2022

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⚡In a line: India has finally found a way to get cheaper funds for its green energy projects: Sovereign Green Bonds.

💡Quick question: So, would you be willing to invest in these bonds and help save the environment while making less money? Or will you stick to your regular investments?

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