Climate change is one of the gravest challenges facing economies and societies, in the 21st century. According to the World Economic Forum’s (WEF), Global Risks Report 2023, two of the top five most severe risks facing the planet, in the coming decade, concern, ‘failure to mitigate climate change’ and ‘failure of climate-change adaptation’. If left unaddressed, the impacts of the climate crisis can be severe and far-reaching. According to estimates by the World Bank and the World Health Organization (WHO), climate change is expected to push more than 120 million people into poverty by 2030 and cause approximately 2,50,000 additional deaths, per year from malnutrition, diseases and heat stress. If nothing is done to combat climate change, global GDP is estimated to shrink by 18% (compared to a world without global warming), according to a report by the Swiss Re Institute.

India is particularly vulnerable to climate risks. Ranked amongst the countries most vulnerable to climate change, it is estimated that heat stress will force India to lose 5.8% of its working hours by 2030, putting 4.5% of the country’s GDP at risk, annually.1

Need for financing climate transition

Governments across the globe are being called upon to respond to the impending climate emergency. Over 190 countries have signed the Paris Climate Agreement, committing to limit global temperature rise, with over 33 countries (and the EU) undertaking targets to reach net zero emissions. India has also announced a target to become a net zero nation by 2070 and committed to achieve about 50 percent of its cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.

Achieving these climate commitments requires the mobilization of large quantum of finances to drive climate adaptation and transition. According to a report by the World Economic Forum, an estimated USD 50 trillion in incremental investments is required by 2050 to transition the global economy to net-zero emissions and avert a climate catastrophe. These investments are required to bring-to-market breakthrough technologies in energy efficiency; carbon capture, hydrogen-based fuels, amongst others, and to decarbonize hard-to-abate sectors such as iron & steel and cement. India itself requires an estimated investment of USD 10.1 trillion to reach net zero by 2070 target, with investments of over USD 8.4 trillion needed by its power sector alone.2 While majority of this financing will have to be driven by domestic financial institutions and markets, external financial flows will be needed to plug substantive gaps in financing, in order for India to achieve its climate goals.

Role of Green Finance

It is in this context that Green Finance – structured financial flows that channelize funds to initiatives and projects, which aim to mitigate climate change and contribute to sustainable development, has been gaining momentum, globally. Green financing can take many forms such as green loans; green debt mechanisms; blended finance vehicles; and investments; that all aim to achieve climate positive outcomes. Globally, green finance has played a key role in driving much needed funding to key climate-aligned sectors such as renewable energy, clean transportation, energy efficiency, circular economy, amongst others. According to a report by TheCityUK and BNP Paribas, global green financing, grew over 100 times in the past decade, swelling to $540.6 billion in 2021 from $5.2 billion in 2012 (includes both global borrowing through green bonds & loans, and equity funding through initial public offerings targeting green projects). Despite the growth, a lot more needs to be done to generate the quantum of funding required to achieve global and national climate targets. Governments, regulators and financial institutions have a crucial role to play in mainstreaming green finance and accelerating the shift to low-carbon.

Green Finance in India: Key developments

Despite being in its nascency, green finance in India has witnessed significant traction in the last few years, thanks to several proactive measures taken by the Indian government, regulators and the banking sector.

The Government of India has placed green finance at the center of its “Panchamrit” climate transition roadmap and highlighted climate action as a national priority in its 2022-23 budget. As part of its overall market borrowings in 2022-23, the government launched its first sovereign green bonds, raising INR 16,000 crore (USD 2 billion) through two issuances. The proceeds of these issuances will be deployed in public sector projects that help reduce the economy’s carbon intensity. In addition to being oversubscribed multiple times, India’s first sovereign green issuance sold at a ‘greenium’ of 6 basis point versus the benchmark 10-year and 5-year bonds, signaling a strong appetite for domestic green debt issuances.

The launch of the government’s Framework for Sovereign Green Bonds and its two successful issuances are landmark initiatives in India’s burgeoning green finance landscape, which will go a long way in acting as crucial benchmarks for domestic players looking to raise rupee denominated green debt. Other initiatives by the government, such as its authorization of 100% annual Foreign direct investment (FDI) for renewable power generation and distribution projects3, and its electric vehicle subsidies, have also played a key role in bolstering flows of green finance to climate-aligned sectors.

Green Bonds have emerged as a popular mechanism for raising debt and channelizing finances towards climate-aligned activities. In 2017, India’s Securities and Exchange Board of India (SEBI) was quick to recognize the potential for green bonds and formalized regulations for the issuance and listing of green debt securities. Since then India has emerged as one of the largest issuers of green bonds amongst emerging economies, raising a cumulative USD 43 billion, till date.4 In February 2015, YES BANK issued India’s maiden green bond Infrastructure bond, kickstarting the green bond market in India.

The Reserve Bank of India (RBI) has incentivized lending towards green industries and projects by including renewable energy projects under its Priority Sector Lending (PSL) norms. In 2012, the central bank began by including loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-grid renewable energy solutions for households. In 2015, this was expanded to bank loans up to a limit of INR 15 crore to borrowers for purposes like solar based power generators, biomass based power generators, windmills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote village electrification. In 2020, the limit for such bank loans was further doubled to INR 30 crore. To help build awareness about climate risk and the importance of green finance, amongst financial intermediaries, the RBI published a ‘Discussion Paper on Climate Risk and Sustainable Finance’ in 2022. The banking regulator also issued a ‘Framework for acceptance of Green Deposits’ enabling banks to channelize deposits from customers, towards augmenting the flow of credit to green activities/ projects.

Scaling up green finance

Scaling up international and domestic green finance flows is imperative to achieve India’s timely climate transition. For a thriving green finance ecosystem, 5 core enablers are of most importance – a green finance taxonomy, policy support to emerging green opportunities, capacity building of financial institutions on green products & innovative financial mechanisms, enhanced disclosures, and third-party assurance/verification.

The definition of green finance in India, must take into account the Indian context as well as India’s climate ambitions and transition roadmaps. Taking cognizance of this, the Government of India and regulators have already initiated concrete steps towards developing an Indian green taxonomy. The government’s framework for Sovereign Green Bonds provides for eligible green categories, as an interim measure, bringing clarity on what constitutes “green”. With a definition to green, green financial products and mechanisms such as Green Deposits are expected to proliferate.

Green finance opportunities are generally not considered on par with traditional ones, owing to their comparative nascency. Policy push and financial & technological innovations would play a key role in addressing market barriers and creating commercially viable green project pipelines, that can provide lucrative opportunities for financiers/investors. Backed by adequate policy support, large scale renewable energy generation has emerged as a commercially attractive avenue. Similar support to other sectors would definitely play a role in tapping into vast range of sunrise sectors such as roof top solar, water and waste, amongst others.

Building capacity to integrate climate and environmental parameters into decision-making processes is imperative for financial institutions, to play a crucial role of intermediation and channelizing funds towards climate action in India. RBI’s ‘Discussion Paper on Climate Risk and Sustainable Finance’ has played a key role in stimulating discussions at board and other levels on this crucial subject and accentuated the need for financial institutions to rapidly build capacity, inhouse expertise and governance frameworks.

Standardized climate related disclosures are important to address data gaps, being faced by the financiers and investors in assessing overall climate performance of their portfolios and clients/investees. SEBI’s mandatory Business Responsibility and Sustainability Report (BRSR) has provided a much needed comprehensive framework for disclosures, however, the coverage as well as climate related indicators are expected to be further expanded over a period of time.

The availability of third-party verification/assurance and impact assessment is crucial to enhance reliability and build trust among financial institutions, investors and other stakeholders. It is equally important that the cost of third-party verification/assurance and impact assessment, does not become a hindrance. While Chartered Accountants are well-versed with financial flows, upskilling them with nuances of sustainable finance accounting could help in making verification services readily accessible for the industry, including Micro, Small and Medium Enterprises (MSMEs), at reasonable cost.

Future of Green Finance

The evolution of green finance will open numerous opportunities on a global scale. Financing of renewable energy projects and electric vehicle (EV) financing are among the many opportunities available for banks to capitalize on. For India and the global community, the path to sustainable finance necessitates a collaborative approach that combines government policy, financial sector innovation, and active participation from all stakeholders. Governments must create an enabling environment by enacting rules and regulations that favor long-term, climate-aligned, investments. Financial institutions also have a major role to play and must progressively integrate climate considerations into their lending and investments decisions to accelerate green finance.

The Indian economy is at a point where it needs to grow quickly, but the challenge is to figure out how to incorporate climate considerations into commercial lending and investment decisions, while balancing the needs of credit expansion, economic growth, and social development. While proactive policy support, regulatory intervention, and innovative financial mechanisms, have given India a significant head-start, active participation of all stakeholders would be increasing the momentum and achieving India’s ambitious climate commitments.

References

Author may be reached at: eboard@icai.in