Bonds have become one of the preferred financial instruments for investors in the hunt for fixed-income securities. Along with fixed regular interest income, comparatively higher returns, and predetermined returns, bonds also offer many other advantages to interested investors.
You can explore information about bonds, type of bonds, features of a green bond, etc. to make informed investment decisions. It can help you live your dream and achieve your various financial goals in your life.
What are Green Bonds?
Let us here know what are Green Bonds and the pros of green bonds? Green bonds are the debt securities used to raise money to fund projects related to clean energy. It is amidst the popular bond types. It is similar to other bond types with a major difference. The fund raised cannot be used for any other purpose other than public sector environment-friendly projects. It is issued by the government.
Features of a Green Bond
Below are the features of a green bond popular among investors:
- One of the best-fixed income instruments.
- Green bonds are the right choice for investors with concerns about environmental conservation.
- It is issued by the government and is a more secured investment option.
- It promotes environment-friendly projects.
- It provides the same features as other bonds with an additional feature of proceeds exclusively allocated for public sector projects with climate or environmental benefits.
The Advantages and Disadvantages of Green Bonds
Similar to other investment products, green bonds carry certain pros and cons. Let us below understand the Advantages and Disadvantages of Green Bonds in brief.
Advantages of Green Bonds
- It is a relatively safe investment source.
- The coupon rate paid is relatively high
- The income earned from green bonds is exempted from taxes.
- The transparency is high, and an investor knows that the money lent is not used in harmful activity.
- Since it is issued by the government, the risk of default is overcome
- A good source for the issuer to invest in activities with more significant social impacts.
- It can enhance the reputation of an issuer
- For an issuer, it can prove to be an additional source of financing
- Pricing advantage to issuers due to high demand from investors and limited supply.
Below are the Disadvantages of Green Bonds
Each bond type has its own pros and cons. Let us here also understand the Disadvantages of Green Bonds in brief.
The tenor of green bonds in India is 10 years while loans are typically for a period of 13 years. The rating is also a big concern. The investors may not be willing to buy green bonds having ratings lower than AAA because of the probability of default risk. Liquidity is also a risk associated with green bonds. A few other disadvantages of green bonds are mispricing, low yield, lack of research, etc.
The yearly green project allocation estimated by the International Energy Agency is $1 trillion. The World Economic Forum suggests a yearly budget of $700 billion for clean energy, forestry, and transportation. Green bonds are known to provide tax benefits which is a key attraction for the buyers of bonds. The interest of corporates in green bonds is increasing due to many good reasons. It will give more investors to make investments in green bonds.