Green fixed deposits: For interest of the environmentally conscious

They're at par with normal fixed deposits but not all banks offer these

By now, most investors are aware of ESG (environmental, social and governance based) funds offered by mutual fund houses. However, not many are aware that a similar, environment-friendly option, exists on the fixed-income side as well in the form of green fixed deposits (FDs). Among those offering such deposits are HDFC, Union Bank and IndusInd Bank. DBS Bank India also launched these deposits about a fortnight ago.

What are green FDs?

ESG mutual funds buy stocks of companies that run sustainable businesses. Similarly, many lenders, too, want to fund businesses and projects that score high on sustainability. Their goal is to promote businesses that are environment-friendly, accountable to society at large, and engaged in tackling issues such as climate change.

An infrastructure lender, for instance, may prefer to fund a solar or a hydro power project over a coal-fired power project. A housing finance company may want to fund a residential complex that has green buildings.

That’s where green fixed deposits come in.

“The funds mobilised through green deposits are utilised towards initiatives that contribute to environment conservation and other ESG initiatives,” says Anup Bhaiya, founder and managing director, Money Honey Financial Services.

Not much difference in rates

Green deposits are like any other FD. The only difference lies in the end use of the money raised. “The difference between a green FD and a normal FD is not about monetary benefits. It is about contributing to a social cause. Interest rates of green FDs are similar to those offered by normal FDs of the same lender, with perhaps a small difference,” says Joydeep Sen, corporate trainer (debt) and author. He adds that the difference in interest rate is not substantial enough to sway investors’ decision.

HDFC, for instance, offers 5.65 per cent on green deposits of 24-35-month tenure and 5.75 per cent on regular deposits of a similar tenure. Both rates are for the monthly income payout options. HDFC offers green deposits for varied tenures.

On the other hand, Union Bank offers 5.5 per cent on Union Green Deposits of 1,111 days, the only tenure option for such investments. This is 10 basis points more than what the bank offers on a normal FD.

Green deposits don’t offer any additional benefit, such as tax deduction.

Should you invest?

Fixed deposits are a relatively safe investment option. Even in the case of green FDs, deposit insurance of up to Rs 5 lakh is available if they are issued by a bank, but not if they are issued by a non-banking financial company.

“Socially conscious investors should opt for green FDs,” says Sen.

However, not every bank offers green FDs. If you wish to invest in one, you may have to go to a new bank.

“In these days of digital banking, opening an account with a new bank is not a hassle. However, even when you wish to invest in a green FD, you must stick to banks you are comfortable dealing with,” says Sen.

Inflation poses a major risk to investments in these FDs. If it remains sticky at the current level of over 6 per cent, the real rate of return from these deposits would be negative.

Finally, interest rates are likely to rise in the near future. “Interest rates are expected to go up this year. The market expects the Reserve Bank of India to hike the repo rate by around 40 basis points. FD rates should also rise in such a scenario,” says Bhaiya. He suggests investors avoid locking into long-term FDs at this stage and instead stick to those having a shorter tenure.