A Green Bond is a type of fixed-income instrument that is specifically designed for funding climate and environmentally friendly projects. The main feature of green bonds is that they provide transparency and accountability regarding the use of proceeds. The issuers provide detailed information on how the funds will be utilised for environmental projects and this transparency helps the investors to evaluate the environmental integrity of the funds and ensure the funds are used as intended. They are a part of the socially responsible investment category. To make them more attractive to investors, they usually provide with either tax exemption or tax credits to the investors.
There are many ways green bonds are contributing to the financial market and some of them are listed below:
Mobilizing Capital for green projects: They enable issuers to access capital markets and raise funds specifically for environment friendly initiatives. By issuing green bonds, entities can tap into a new pool of capital that might not have been available through traditional financing channels.
Promoting environmental awareness: These bonds raise awareness about environmental issues and promote sustainable practices. It’s encouraged issuers to prioritize and allocate resources to sustainable projects, fostering a transition towards a low-carbon and climate-resilient economy.
Standardization & Market development: Green bonds have spurred the development of industry standards and guidelines, such as the Green Bond Principles, which provide a framework of transparency, disclosure and reporting. This standardization helps build investor confidence, facilitate market growth, and promote the credibility of green finance.
Investors seeking socially responsible investment assets that align with their environmental values can choose to invest in Green bonds however, they should verify the claims of sustainability made by bond issuers before investing as sometimes the impact of certain funds are overly exaggerated. In a nutshell, green bonds play a crucial role in linking environmental objectives with the financial markets. They mobilize capital for sustainable projects, promote transparency and contribute to the transition to a greener and more sustainable economy.
Credits:
Nitin Sharma
Financial Planning
