We will cover what green bonds are and whether they are attractive for a fixed-income portfolio.

The News

Last week, in a first of its kind, the National Highways Authority of India (NHAI) announced that it will raise ₹1000 crore by issuing green bonds via its wholly owned subsidiary—Delhi-Mumbai Expressway Development Limited (DMEDL).

Interestingly, when the RBI issued the first sovereign green bond last year, it was a major success. The ₹16000 crore offering was oversubscribed by more than four times. Investors were willing to accept slightly lower returns, known as a ‘greenium’.

Sounds great, right? Well, here’s a twist. On 29th November, the RBI held an auction to raise ₹5000 crores via sovereign green bonds, and surprisingly (or shockingly) the response was quite disappointing.

Of the ₹5,000 crore offered, only ₹1,502 crore was sold, with a yield of 6.79%. The remaining had to be bought by primary dealers—institutions who are bound to step in when other buyers don’t show interest.

Now, before I tell you what’s happening, let’s quickly go through what green bonds are.

💡 Green Bonds

A bond is like a loan where you lend money to a government or company for a fixed time, and they repay you with interest.

Green bonds work the same way but are specifically issued to fund eco-friendly projects like renewable energy, clean transport, or sustainable farming.

Though the interest rate offered by a bond depends on the overall market scenarios and credibility of the issuer, here are a few challenges that green bonds are specifically facing.

The Challenges

1. Low Returns
Usually, green bonds offer lesser interest to investors than regular bonds because they cater to a niche market of socially conscious investors who are willing to accept slightly lower yields for contributing to sustainable causes.

2. Low Liquidity and Flexibility
Green bonds often have a smaller market and fewer buyers compared to regular bonds because of the reasons mentioned above, making it harder to sell them quickly if needed.

Globally, it’s quite the opposite picture. In 2023, the global green bond market was valued at $588 billion, majorly fueled by strong regulations and incentives, creating demand even when the returns are lower.

With $21 billion in green bonds, India represents a mere 2.2% of global issuances in 2023.

Europe is a leader in green bond issuance, but the United States and China are also major issuers. In India, though the government is committed to fighting climate change, the regulations are relatively less strict.

To Conclude

The positive environmental impact of investing may attract a few investors, but lower returns and limited liquidity can make them a less appealing option for many compared to regular bonds.

It would be interesting to see how the developments evolve and what RBI does to make green bonds mainstream.