World Environment Day is just around the corner. It is celebrated on the 5th of June, every year to emphasise the importance of sustaining nature and implementing practices that protect the natural surroundings. As we celebrate World Environment Day this year, let us also consider the importance of sustainable investment practices.
There are numerous ways to implement sustainable investing; green bonds are one of them. Green bonds are fixed-income financial instruments specifically designed to fund projects with environmental benefits. These projects include renewable energy, energy efficiency, sustainable agriculture, waste management, and clean transportation, among others.
At the beginning of 2023 (January and February), India launched its first-ever Sovereign Green Bond and raised $2 billion to fund climate-related projects which attracted more than 4x oversubscription. It indicates the wide adoption of this unique investment tool and evolving investor preferences to support environmentally friendly projects.
However, there are certain factors that need to be considered when investing in green bonds as investing in them is not a traditional investment approach. Here are the does and don’t of investing in green bonds.
Do’s of Investing in Green Bonds
1. Evaluate financial viability: While the environmental benefits are essential, you need to analyse the financial aspects of the bond. Since the current bonds issued have a sovereign guarantee, there is no credit risk. However, the long duration of the bonds makes them sensitive to interest rate movements. Assess factors such as the bond’s credit rating (if issued by non-government entities) yield, and liquidity to understand the potential returns and associated risks. Also, always consider your long-term goals and risk tolerance level before making investments in green bonds or any other instrument because the sustainability of your financial goals is crucial, too.
2. Understand the purpose: Before investing in green bonds, it is crucial to familiarise yourself with the purpose and goals of the bond issuer. Read the bond’s prospectus or official statement to gain insights into the specific projects the bond will fund and their expected environmental impact.
3. Assess the issuer’s credibility: Look for green bonds issued by reputable entities such as government agencies, development banks, and well-established corporations. You should also consider their track record, financial stability, and commitment to environmental responsibility.
4. Conduct due diligence: It is essential to research the issuer’s environmental policies, practices, and transparency regarding project selection and impact assessment. Look for third-party certifications or ratings like Climate Bonds Initiative certification, which ensures the bond meets stringent environmental standards.
5. Diversify your portfolio: You should consider incorporating green bonds as part of a diversified investment strategy. Balancing your investments across various sectors and geographies can reduce risks and maximise returns for long-term wealth creation.
Don’ts of Investing in Green Bonds
1. Avoid greenwashing: Greenwashing refers to misleading claims or insufficient disclosure of environmental benefits. You need to be cautious of bonds that lack credible documentation, detailed reports, or third-party verification of their green credentials. The ideal way to approach this is to scrutinise claims made by issuers and ensure they align with recognised sustainability standards.
2. Don’t overlook market liquidity: Green bonds usually have different liquidity characteristics compared to traditional bonds. It is important to assess the liquidity of the bond and determine if it aligns with your investment goals and time horizon. Illiquid bonds may not be suitable for short-term investment needs.
3. Beware of potential risks: As with any investment, green bonds come with certain risks. You need to consider factors such as interest rate risk, issuer default risk (if issued by a non-government entity), and market risk. Diversification and thorough analysis can help you mitigate these risks.
4. Don’t solely focus on yield: While the financial aspect is significant, you need to remember that green bonds primarily aim to generate positive environmental impact. Avoid solely chasing high yields without considering the genuine commitment of the issuer towards sustainability.
5. Don’t ignore professional advice: If you are unsure about investing in green bonds, seek guidance from financial advisors or experts with expertise in sustainable investing. They can provide valuable insights, help you navigate the market, and align your investments with your financial goals and environmental values.
Conclusion
Investing in green bonds presents a unique opportunity to align your financial goals with your commitment to the environment. As India strives to build a greener future, investing in green bonds can play a vital role in supporting the country’s environmental initiatives.
Green bonds are fixed-income financial instruments specifically designed to fund projects with environmental benefits.
