By - King Stubb & Kasiva on September 29, 2023
Growing carbon footprint in industrial sectors such as power and steel, has thrust them into the spotlight as the major contributors to global warming & global climate crisis. Mitigating this climate change requires a fundamental transformation in industrial practices and processes to significantly reduce carbon emissions. Achieving this transition requires substantial investment, and the solution lies in the realm of sustainable aka "green" financing.[1]
Green finance, at its core, aims to redirect financial resources from various sectors, including banking, micro-credit, insurance, and investment, toward sustainable development priorities. Defined by the United Nations Environment Programme, it encompasses not only allocating funds but also responsibly managing environmental and social risks, seizing opportunities that yield both a decent return on investment and environmental benefits and ensuring greater accountability.
Promoting green financing entails a spectrum of strategies, such as revising national regulatory frameworks, aligning public financial incentives, increasing green financing across various sectors, and harmonizing public sector financing decisions with the environmental aspect of the Sustainable Development Goals (SDGs). It also involves boosting investments in clean and green technologies, financing sustainable natural resource-based green economies and climate-smart blue economies, and expanding the use of green bonds, among other initiatives.[2]
Green finance has taken centre stage in India's commitment to addressing climate change and advancing sustainable development. The recent revisions to the Nationally Determined Contributions (NDCs) underscore the urgency, aiming to reduce India's carbon intensity by over 45% by 2030 compared to 2005 levels. Meeting these ambitious goals requires a substantial infusion of approximately $403 billion in renewable finance by 2030.[3]
In the initial stages, green finance necessitates substantial support from governments. The Indian government has identified projects worth ₹25,000 crore that will be financed by proceeds from sovereign green bonds issued in the current fiscal year and the next. These projects primarily focus on renewable energy and clean transportation segments.[4]
The first tranche of sovereign green bonds was issued in January, receiving a robust response from the market, with orders exceeding the offer size by more than four times. Credit rating agency Fitch recognized that these sovereign green bonds reflect India's growing policy emphasis on scaling up domestic financing capacity for climate mitigation and adaptation.
The sovereign green bonds are designed to finance public projects across nine key areas, including renewable energy, climate change, clean transportation, sustainable water and waste management, and pollution control. A green finance working panel, led by Chief Economic Adviser V. Anantha Nageswaran, has been established to select projects from proposals submitted by various government departments.[5]
Globally lots of governments are showing interest in green finance. The market started by the World Bank[6] in 2008 with its first labelled green bond has now reached a staggering 2.7 Trillion USD & India’s Issuance of thematic debt is at 30 Billion USD.
Green Finance institutions have also shown keen interest in Indian companies. For example, the International Finance Corporation (IFC) announced a significant investment in a sustainability-linked bond issued by Tata Cleantech Capital, which finances renewable energy projects.
While green finance holds great promise, it is not without risks. Effective regulation of this sector is crucial. Ensuring compliance and preventing unethical practices are essential. Checks and balances are needed to safeguard against potential misuse of green finance. Corporate India is increasingly recognizing the intangible benefits of good governance, reputation, and goodwill associated with becoming more environmentally, socially, and governance standards (ESG) compliant.[7]
There’s also a problem in pricing the issuances. External Certifications, and reporting has also increased the bond issuance costs, in price-sensitive country such as India this can be challenging. Indian Issuers are issuing green bonds in the international markets (US Bonds) to get ‘Greenium’ & better pricing while keeping the costs at bay.[8]
On March 8th, RBI Governor Shaktikanta Das announced that the central bank would soon issue guidelines for regulated entities to increase green lending, accept green deposits, and mitigate risks related to climate change.
Businesses that embrace green finance can reap various benefits. They can ensure compliance with environmental norms and regulations, reducing the risk of fines and penalties. Moreover, as climate change gains significant public attention, adopting sustainable practices through green finance can enhance a company's brand value and differentiate it positively.
Consumers increasingly favor brands that adopt clear sustainable practices. Green finance also often leads to cost savings, particularly through energy-efficient practices, which can boost overall profitability.
In this escalating climate crisis, India has taken a monumental stride toward a greener and more sustainable future. The issuance of these sovereign green bonds stands as a very significant milestone in this journey, extending their critical support to the projects aimed at reducing India's carbon footprint, with the aid of domains such as renewable energy and clean transportation.
While challenges and risks persist in the landscape of green finance, India's unwavering commitment to effective regulation, coupled with the burgeoning global interest in green initiatives, paints a promising picture for the country's sustainable development. As India navigates the intricate terrain of climate change, green finance emerges as a potent tool, not just for mitigating carbon emissions, but also for fostering resilience and sustainable growth in an unpredictable world.
Green bonds stand out as specialized debt instruments crafted explicitly to fund environmentally beneficial projects. Unlike regular bonds, which serve as versatile financial tools, green bonds are dedicated exclusively to initiatives that yield positive environmental impacts, such as funding renewable energy ventures or supporting pollution control measures.
The RBI has a pivotal role in driving green finance since it will be issuing guidelines and regulations that incentivize and regulate the entities that participate in green lending, accept green deposits, and manage risks associated with climate change. These guidelines will provide a comprehensive framework for financial institutions to help seamlessly integrate environmental considerations into day-to-day operations & portfolio management.
Businesses that wholeheartedly adopt green finance practices can accrue a multitude of benefits. Beyond demonstrating a robust commitment to sustainability, thereby enhancing their standing among environmentally conscious consumers, they can also realize cost savings through the adoption of energy-efficient practices, ultimately boosting their overall profitability.
[1] https://wwf.panda.org/discover/our_focus/finance/environmental_green_bonds/
[2] https://www.oecd.org/environment/cc/Green%20bonds%20PP%20%5Bf3%5D%20%5Blr%5D.pdf
[3] https://thedocs.worldbank.org/en/doc/c68d5c90796897b1628c25fea3590a5b-0340012023/original/Case-Study-India-Green-Bond-TA.pdf
[4] https://dea.gov.in/sites/default/files/Framework%20for%20Sovereign%20Green%20Bonds.pdf
[5] https://pib.gov.in/PressReleasePage.aspx?PRID=1874788
[6] https://blogs.worldbank.org/climatechange/india-incorporates-green-bonds-its-climate-finance-strategy
[7] https://ieefa.org/resources/indian-capital-market-regulators-updated-green-debt-guidelines-unlocking-potential
[8] https://climatedata.imf.org/datasets/8e2772e0b65f4e33a80183ce9583d062_0/about
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