Green Bonds as an Important Investment to Save Green Environment in 2021

Green Bonds as an Important Investment to Save Green Environment in 2021

Green bonds have been stirred up after a large group of insurance companies in Japan provided support to developing countries by investing in green bonds. Based on Energy Live News, the insurance companies include Thai Dai-Ichi Life Insurance Company, Fukoku Mutual Life Insurance Company, Nippon Life Insurance Company and Sumitomo Life Insurance Company. The company has invested in bonds to support climate action. This project will have a good impact on the earth because it can support renewable energy, energy efficiency and technologies in waste management and agriculture that reduces greenhouse gas emissions.

Focused of the discussion in this article is the general concept of green bonds and the importance of investing in order to maintain a green earth. This is related to Sustainable Development Goal 13 to take urgent action to combat climate change and its impacts.

Related Article : Climate Action: 5 Reasons Why the World Should Combat Climate Change

The history of green bonds

A United Nations agency, the Panel for Climate Change, publishes a report linking global warming and human activities. This is encouraging to consider financing projects that make a positive contribution to the environment.

Green bonds were issued by international organizations such as the World Bank, African Development Bank and the European Investment Bank. And finally, Indonesia issued green bonds in 2018 and PT Sarana Multi Infrastruktur (SMI) became the first issuer in Indonesia. The bonds issued in this first phase amounted to Rp 500 billion, from the planned Sustainable Public Offering for Green Bonds worth Rp 3 trillion. Projects that will be supported include financing for Light Rail Transit (LRT) in Palembang and Jabodetabek, mini hydro electricity in North Sulawesi, water treatment in Cilegon, Banten.

In 2020, the cumulative issuance volume reached US948bn. The main source of finance comes from financial and non-financial corporation. And the country that issued the largest bonds was still the United States, followed by Germany, France, and China.

How does the market work?

The Green Bonds Market

Green bonds are issued by companies as a positive form of marketing to expand the business of investors, including investors. Among other things, provide funding and investment for new projects as well as ongoing projects with environmental benefits. This bond can be interpreted as retail bonds with plain villa characteristics (as well as a fixed interest rate and can be withdrawn in full on the maturity date).

There are several parties that need to know about this type of investment. The issuers can come from the government, development banks, commercial banks, and cooperatives. While the coupon rate of return consists of zero coupon, fixed-rate, index-linked, coupon-linked. Green bonds rating is equivalent to unsecured debt so that the repayment of these bonds is in accordance with the issuer’s credit risk.

Are green bonds effective?

Research conducted by Caroline Flammer, resulted in the finding that the stock market responded positively to the announcement of the issuance. At the beginning of issuance, this topic became very popular among investors and were dubbed the “green bond boom”. In addition, using a sample from public companies, there is a significant increase in environmental performance, suggesting that green bonds are effective in improving environmental footprint compaies. Meanwhile, in terms of the long-term impact, it is possible to increase in terms of the company’s financial performance.

However, the green bond market in Indonesia is considered to have slow development. The number of issuers only consists of the government and PT SMI. In addition, the amount of investment from green bonds amounted to USD3.8 billion. This is due to the lack of interest of the Indonesian people towards environmental issues.

Benefit to stakeholder

Many argue that this investment provide little benefit to stakeholders. Research conducted by Dragon Yongjun Tang find that the issuers stock prices increase significantly around the announcement of this bonds for the first time. Furthermore, there is no solid evidence to say that this bonds are issued at lower yields than regular corporate bonds from the sam issuers, suggesting that the main advantage of green bonds is not cheaper debt financing. So, no need to worry about trying to invest in green bonds because green bonds can help enlarge the investor base by issuing green bonds can attract more media exposure. In addition, the impact of green bonds can also be used by investors to fulfill their investment mandate.

There are other benefits that investors will get when choosing to join this investment. Green bonds can get investors to engage with a greener and cleaner technology sector without too much effort. They can invest as well as carry out activities that have a positive impact.Moreover they don’t have direct exposure to the wind or solar projects and therefore they can get green credentials without doing a deep dive risk analysis on these emerging technologies. The requirements for owning green bonds are also not complicated, almost the same as ordinary bonds.

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