Though a relatively new idea, green bonds have become very popular. They are debt instruments that public or private companies issue to fund their government-friendly projects.
Green bonds appear to be the preferred investment option as environmental awareness grows throughout the world. Also, they come with attractive advantages like tax credits and tax exemptions.
To learn how a green bond works, keep reading.
What Are Green Bonds?
The European Investment Bank (EIB) first issued the green bond in 2007. Green bonds are a fixed-income investment that helps raise funds for specific environmental and climate-related projects. The purpose of the bond is to encourage and support climate-related and sustainability projects.
It can include projects for sustainable resource use, clean transportation, renewable energy (hydro, solar, and wind), adaptation to climate change, and conservation.
The government, private companies, and organizations may issue green bonds. It may include tax incentives like tax credits and tax exemptions to attract investors.
How Green Bonds Work
If the government or a company wants to raise funds for a green project, it will issue green bonds. Green bonds are just like any other bond—the only difference is that they are for sustainable and environmentally friendly projects.
Borrowers issue the bonds, and the investors who purchase them gain benefits when the bond matures. So, with time, the investors will receive interest. However, these bonds are not for everyday investors. Green bonds are typically offered to organizations that can buy the bonds in bulk.
The four main components of green bonds are:
1. Use Of Proceeds
The proceeds given for green bonds must be strictly used for green projects. The documents must clearly specify the project objective and whether the funds are for financing or refinancing.
2. Process For Project Evaluation And Selection
The issuer must convey the criteria necessary for a proposal to be accepted. They must explain the project’s objectives, environmental impact, and other aspects to the investors.
3. Management Of Proceeds
The issuer has to track the bonds and inform the buyer of the intended use of the proceeds. They must ensure that the funds the bonds generate are used correctly and for specified purposes only.
The issuer has to regularly update the investor about how the proceeds are being used, the progress of the project, its environmental impact, and more.
Some Examples Of Green Bonds
Green bonds are generally used to finance the following types of projects:
Natural resources and land management projects: These involve developing and implementing strategies to protect and conserve natural resources. It includes protection of forest land and erosion control.
Green buildings projects: These projects include creating structures that are resource-efficient and building them using environmentally responsible processes
Clean transportation projects: These projects involve developing different transport modes with lesser CO2 emissions. They include the production of electric bikes and cars as an alternative to diesel and petrol-powered automobiles.
Energy efficiency projects: These projects work on making household appliances and other highly used appliances more energy efficient. These projects can also be related to decreasing CO2 emissions.
Pollution prevention and control projects: These projects work on decreasing pollution and emissions of greenhouse gases.
Wastewater and water management projects: These projects include wastewater treatment, water navigation, hydropower generation, and fish and wildlife mitigation. They also cover enhancement, water supply for irrigation and municipal and industrial purposes, flood and storm damage reduction, and more.
Waste management: These projects finance, design, or plan one or more parts of the waste management process. It could work on waste collection, transportation, disposal, or any other task that promotes proper waste management.
How Is The Green Bond Different From The Blue Bond
While green bonds are for environment-related projects, blue bonds are for projects related to the ocean and other water bodies. They can be used for projects like the protection of coral reefs, removing plastic from water, wastewater treatment, and sustainable fisheries.
Blue bonds fall under the “green bonds” category because they intend to improve the environment. However, all green bonds are not blue bonds.
Green bonds are investments in initiatives that work on the improvement of the climate and the environment. Although they are for projects aimed at sustainability, they function exactly like any other bond.