How Green Bonds Work?
Stakeholders all over the world are concerned about the irreversible damage being caused to the ecosystem of the earth. There is a common belief amongst people that the natural habitat on planet Earth has been irreversibly damaged. It is true that climate change affects all of us. It is also true that very soon the earth is going to run out of finite natural resources like oil and other fossil fuels. Hence, it is imperative that businesses start investing in projects which are environment-friendly.
However, businessmen all over the world are apprehensive about the possible returns from investing in such green projects. Hence, the concept of Green bonds has been introduced to help organizations manage their move towards sustainability without putting undue pressure on their finances. After all, markets tend to work towards what is cost-effective rather than what is environment-friendly!
There is still considerable ambiguity about the entire life cycle of a green bond. In this article, we will explain the concept of green bonds and how they work in great detail.
What is a Green Bond?
A green bond is primarily a debt instrument. Financially it is not very different from other bonds in the sense that it is a fixed income instrument and pays a coupon payment. However, the bonds are unique in the sense that they are exclusively used to finance green projects. This could be a new green project being built from scratch or an existing project being converted to more environment-friendly norms.
The European Investment Bank pioneered the issuance of green bonds in the year 2007. In the beginning, the issue size was very small. However, over a period of time, more investors and institutions have shown interest in this financing instrument. As a result, there is now a thriving primary and secondary market for these bonds.
Advantages of Green Bonds
Investors across the world are queuing up to buy green bonds. This can be seen from the fact that almost all green bond issues made till date have been oversubscribed.
The process of Issuing Green Bonds
The first step in the issuance of green bonds is that the project is identified. It is essential that the project is reviewed and certified by a third party. This ensures that the project is indeed based on low carbon emissions. The process is as follows:
Challenges Pertaining to Green Bonds
Green bonds also have their set of challenges.
To sum it up, green bonds are an innovative idea to finance eco-friendly projects. However, they are still at a nascent stage and need to be developed further.
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