The Government is aiming for a greener economy. Businesses and organizations are trying to support their production through green resources. Green economy, green bonds, green business and going green has become the current anthem worldwide! We know what green economy and green business mean but as I wasn’t aware of ‘green bonds’ initially, same will be the case with many of you. So, today with the help of this article, let’s gain an understanding of the term.
Green bonds: In simple language, these are the bonds issued by the Government and are tax-free. These bonds are used for underdeveloped localities mostly by municipalities or federally qualified organizations. The purpose of these bonds is to finance projects which are aimed at achieving energy efficiency, protection of aquatic and terrestrial species, curbing pollution, managing water quality and quantity and clean transportation, to name a few. Due to the tax-free status, purchasing this bond accounts for a lucrative investment when compared to a taxable bond. This tax-exempt status acts as a financial incentive to handle social issues such as preserving energy sources and climate change.
Qualifying for a green bond requires:
1. The building is at least 20 acres in the size
2. The project will receive a minimum of $5 million from the state or the municipality
3. A minimum of 75% of the building is registered for Leadership in Energy and Environmental Design (LEED, a rating system developed to measure the environmental impact of the building) certification.
Certain benefits of green bonds are:
Reducing the cost of the project: These bonds are an excellent system of saving a large amount of capital to support environmental investment. Ideally suited for large-scale green projects such as solar and wind development which require capital investments prior to revenues and which generate modest revenue over a long time-period.
Investor demands: Due to the increasing awareness for a green financial market, there is a constant demand of socially responsible investment projects. Owing to this scenario, investors are expressing strong interest in purchasing of green bonds. While retail investors seek investment through their brokers and fund managers, institutional investors use these bonds to handle social, economic and Government mandates. Before green bonds came into the picture, it was a struggle to address these mandates with fixed income tools. This is the reason why these bonds have been successful in attracting new investors thereby providing a new platform for future issuances.
Building brand value: As the major provider of these bonds are the Government, they strike the chance and brand themselves as innovative and dedicated to keeping pace with the green projects.
Leadership: Talking about the future, green bond issuers are the leaders of the world. With their active participation, they can encourage municipalities to participate and create a reputation for monetary innovation. This will make way for upcoming projects in financing environmental projects.
Sharing the time when efforts are put-in to preserve the environment, green bonds are an altogether new opportunity for investors and issuers. Apart from the above-mentioned benefits, green bonds are known for several other advantages over other financing options, some of which are:
Providing a medium to access sustainable investments in a fixed income market in familiar and low-risk surroundings.
Allowing the municipalities to develop a public-private partnership to speed-up the process of energy efficiency and technological advancement.