Green bonds are a type of debt instrument used to finance environmental or climate-related projects. In Australia, green bonds have been used to finance various projects, including renewable energy, energy efficiency and water conservation.
The Australian government has been a strong supporter of green bonds, with the Commonwealth Bank of Australia issuing the first green bond in the country in 2014. Since then, several other banks and financial institutions have followed suit, with over A$5 billion worth of green bonds issued in Australia as of 2019.
How do green bonds work?
Essentially, they work in the same way as any other bond. The issuer borrows money from investors for a set period and pays interest on that loan, and the main difference is that the proceeds from a green bond must be used to finance environmental or climate-related projects.
This provides investors with the assurance that their money is being used for a good cause. It also allows issuers to tap into a new source of capital to finance environmentally friendly initiatives.
Both private and public entities can issue green bonds, and they can be used to finance projects at any stage of development. For example, green bonds have been used to fund the construction of new renewable energy power plants and the retrofitting of existing buildings with energy-efficient lighting or insulation.
The Australian government has set a goal of having 20% of the country’s electricity generated from renewable sources by 2020. Green bonds will play a crucial role in helping to achieve this target, as they provide a key source of financing for renewable energy projects.
Green bond options
If you’re interested in investing in green bonds, several options are available. You can purchase green bonds directly from issuers or invest in them indirectly through a fund or exchange-traded fund (ETF).
You can also buy green bonds through a secondary market, where investors trade bonds that have already been issued. Secondary markets provide greater liquidity than primary markets, but they also come with more risk.
Benefits of investing in green bonds
Green bonds offer several benefits for investors. Firstly, they provide a way to invest in projects that positively impact the environment. Additionally, as physical assets back, green bonds tend to be more stable than other investments. This makes them an attractive option for risk-averse investors.
The risks associated with investing in green bonds
However, some risks are associated with investing in these types of bonds.
Unable to repay the bond
One of the most significant risks is that the issuer may not be able to repay the bond. This could happen if the project that the bond was used to finance does not go as planned. For example, if a wind farm is not built or a solar panel factory does not produce enough panels, the issuer may not have the revenue to repay investors.
Lower payments than traditional bonds
Another risk is that the interest payments on green bonds may be lower than traditional bonds. This is because green projects tend to be riskier, and therefore, investors require a higher return to compensate for this risk.
Finally, there is the risk that the market for green bonds may not be as liquid as the market for traditional bonds. It may be challenging to sell your bond if you need to exit your investment early.
When considering an investment in green bonds, it’s essential to do your research and understand the risks involved. Green bonds are a relatively new asset class, and there is still a lot of uncertainty surrounding them. However, if you’re looking for a way to invest in environmental or climate-related projects, green bonds could be a good option for you. New traders who want to trade in stocks and bonds are advised to use an experienced and reliable online broker from Saxo bank and trade on a demo account before investing in green bonds.