InvestorQ : What are green bonds and can we invest?
Riya Dwivedi made post

What are green bonds and can we invest?

rhea Babu answered.
2 years ago
Green bonds are debt instruments whose proceeds finance projects with various environmental benefits - including climate change mitigation. Green bond issuers commit to providing investors with detailed on-going information on the projects and infrastructure supported with the green bond proceeds. Green bonds enhance an issuer's reputation, as it helps in showcasing their commitment to sustainable development. It also provides issuers access to a specific set of global investors who invest only in green ventures. With an increasing focus of foreign investors towards green investments, it could also help in reducing the cost of capital.

The criteria for issuing green bonds itself mandates work towards sustainable practices. These include-

  • Use of proceeds: Proceeds are exclusively used for legally documented green projects.
  • Project evaluation and selection process: The issuer should clearly communicate to investors the environmental objectives and the process to determine how the project fits within the eligible green project’s categories and related eligibility criteria.
  • Management of proceeds: The net proceeds of the green bond should be credited to an account for tracking and verification.
  • Reporting: The issuer must follow mandatory reporting on the use of the proceeds to ensure the integrity of the market.
The development of vibrant green bond markets allows countries and organizations to mobilize traditional debt investments into projects that can have positive and environmentally friendly impacts on society. Green bonds also give investors an opportunity to meet their environmental, social, and governance (ESG) objectives by creating low-carbon investments.

A key question for investors in green bonds and similar instruments is how to verify that the promised environmental benefits are, in fact, delivered. Savvy investors can perform due diligence and evaluate the (expected) environmental benefits of the underlying projects. Major investment managers can engage with issuers to provide impact reports. The incentives of firms should be aligned with climate goals.