The bond market has a huge opportunity to be transformed by the incentivization of green bonds (GBs). It is an important way to connect environmental projects with capital markets and investors and channel funding toward sustainable development.
Green Bonds are debt instruments that are asset-linked and backed by the issuer’s balance sheet, which is used to raise funds for climate and environmental projects. They can be issued by governments, international institutions, or private companies.
Compared to traditional debt, GBs offer a number of benefits, such as lower interest costs and de-risking. They also attract a growing number of people who want to invest in environmentally friendly projects.
Governments and financial institutions have also started issuing GBs, but a few key issues remain to ensure the instrument becomes a success in India.
First of all, a regulatory framework is required to issue GBs. It should adhere to the ICMA’s Green Bond Principles and be aligned with the broader Sustainable Development Goals.
Second, it should stress transparency through rigorous disclosure requirements. It should require a factsheet, pre-issuance external review or rating, annual allocation reports, and impact reports to be published on the issuer’s website throughout the life cycle of the bond.
Third, it should provide a guarantee for the repayment of principal and interest. This should reduce the compliance cost for issuers.
With proper regulatory measures and incentivization, the nascent green bond market can become a lucrative option for issuers. The market is already expanding rapidly worldwide, and there is a huge potential for growth.