Green Finance – Ushering in a new era in the world of finance and investment
Significance of Green Finance
It is estimated that global surface temperature will continue to increase until 2050 and the target of curtailing it within 1.5°C to 2°C of pre-industrial levels would be hard to achieve unless deep reductions in carbon dioxide (CO2) and other greenhouse gas emissions occur from now onwards. Also, as per the Global Assessment Report on Disaster Risk Reduction (GAR), about 700 million people are at a risk of being displaced as a result of drought by 2030 and approximately two thirds of the world would be water stressed by 2025. In this context, nations across the world need to act in unity and with utmost urgency. The need for green financing thus, is an existential necessity today.
The global response to climate change has gathered momentum in recent years. The CoP 26 held in Glasgow in 2021, aims to limit global warming to well below 2°C above pre-industrial levels by 2050, as agreed under the 2015 Paris Agreement and cut the global greenhouse gas emissions by 45 per cent by 2030 and to zero overall by 2050.
India’s ‘Panchamrits’ Action Plan at CoP 26 Summit:
During the CoP 26 summit, India outlined its strategy and action plan to tackle climate change in the form of ‘Panchamrits’, that outline five climate related national commitments to be achieved in the coming decades:
- Achieving net-zero emissions by 2070.
- Raising non-fossil energy capacity to 500 GW by 2030.
- Meeting 50 per cent of its energy demand through renewables by 2030.
- Reducing 1 billion tonnes of projected emissions by 2030.
- Achieving carbon intensity reduction of 45 per cent over 2005 levels by 2030.
Meeting these commitments would require massive financing of environment friendly projects, both from public and private sector, and this is where green financing assumes significance.
Growth of Green Finance and its challenges in the Indian context
As per Climate Bonds Initiative, a champion organisation for green finance, the annual green investment is projected to reach $5 trillion by 2025, globally. The issuances of green bonds in India, though are very low compared to other markets with only USD 18.8 billion during the years 2015 - 2021. Nevertheless, the green bond issuances in India are increasing, with USD 6.8 billion in the year 2021 as compared with only USD 1.1 billion in the year 2020. Over 75% of this has been raised through primary or parallel listing in GIFT IFSC exchanges.
Green Bonds (Amount in USD Billion) - India (2015 to 2021)
Source: Climate Bonds Initiative (Cumulative Issuance: USD 18.8 Billion)
| Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|---|---|
| Issuance ($ Bn) | 1.2 | 1.6 | 4.3 | 0.7 | 3.1 | 1.1 | 6.8 |
Surge in 2021 was heavily catalyzed by primary and parallel listings on GIFT IFSC exchanges (>75% share).
The challenges of green finance in the Indian context are multi-pronged. The supply side constraints exist in the form of a lack of properly green labeled projects. A well-developed taxonomy will ensure uniformity, consistency and standardisation in terms of “what is considered as green?”. The demand side challenges include non-availability of cost-efficient capital due to lower credit rating and higher risk perception by the global investors. The adoption of non-financial disclosures by companies can boost the investor’s confidence and developing a robust ecosystem for identifying, measuring and tracking green projects would attract global financial capital into the green sectors.
Currently, there is lesser awareness and technical know-how with respect to green finance. There is also some shortage of talent and expertise in certification, disclosure and reporting requirements in the ESG landscape. At present, it is only the large sized companies that possess the requisite training and capacity to develop a robust ESG ecosystem. The market infrastructure in the ESG space is still evolving and is a work in progress.
Other challenges in the green financing space include, inter alia, risks relating to ‘greenwashing’, potential maturity mismatches between long-term green investment and relatively short-term interests of investors, lack of adequate private sector investments etc.
As per a report by the Council on Energy, Environment and Water (CEEW), the net-zero transition in India will require funding to the tune of USD 10 trillion. Out of this, US $8.4 trillion would be required to significantly scale up generation from renewable energy (and associated distribution and transmission infrastructure), and US $1.5 trillion would be required to decarbonise the industrial sector (with the remainder for the mobility transition). The study also estimates that there is a high chance that India could face a substantial investment deficit of US $3.5 trillion. In view of resource gap, there is a need to mobilise global capital in the green sector from both domestic and global funds in order to comprehensively address environmental challenges. The role of GIFT IFSC in India becomes very important in acting as a platform to India’s green and sustainable projects for accessing foreign investments.
IFSCA - envisioning GIFT IFSC to emerge as a global hub for Green Finance
Gujarat International Finance Tec-City (GIFT) IFSC, Gandhinagar, set up as India’s maiden IFSC and regulated by IFSCA, can act as a global gateway that caters to both domestic and international green financing requirements. IFSCA, established under the IFSCA Act, 2019, is a unified authority for the development and regulation of financial products, financial services and financial institutions in the IFSCs in India. IFSCA is an associate member of the International Organization of Securities Commissions (IOSCO). IFSCA has also joined the International Network of Financial Centres of Sustainability (FC4S) to work along with other international financial centres for achieving the SDGs and the Paris Agreement commitments.
IFSCA has taken several initiatives to provide access to world class financial services at GIFT IFSC with enhanced focus on ease of doing business and principles of innovation and sustainability. The GIFT IFSC has certain distinct advantages that include the existence well-functioning capital market ecosystem coupled with cost competitiveness and tax incentives (reduced withholding tax of only 4%). The Government has been providing crucial support to develop GIFT IFSC as a gateway for global green finance. The Finance Minister of India in the Union Budget 2022-23 announced that - “Services for global capital for sustainable & climate finance in the country will be facilitated in the GIFT City.”
IFSCA endeavours to develop GIFT IFSC as a global hub for green and sustainable financing facilitating India and developing nations meet their NDCs and net-zero commitments, particularly in the South Asian region. IFSCA, through its regulations and policies, is focused on development of green finance products such as green bonds, green loans, green funds etc.
Regulatory Framework for Green Finance by IFSCA
IFSCA has notified the regulatory framework for listing of various ESG debt securities (green bonds, social bonds, sustainability bonds and sustainability linked bonds) aligned with international standards [1]. The listing regulations also mandate large IFSC listed companies to submit an annual sustainability report with respect to ESG aspects.
Further, IFSCA has specified the regulatory framework for fund management in IFSC requiring large Fund Management Entities to incorporate sustainability-related risks and opportunities in investment-decision making.
Sustainable Banking Framework & 5% Mandatory Lending Target:
On the banking front, IFSCA has issued a framework [2] to promote sustainable lending by IFSC Banking Units (“IBUs”) and Finance Companies (“FCs”). The framework mandates IBUs and FCs to develop a comprehensive Board approved framework on sustainable financing. Further, such entities are required to have at least 5 per cent of their loan assets in the form of lending to green/ social/ sustainable/ sustainability-linked sectors/facilities, starting from financial year 2023-24.
IFSCA has also constituted an Expert Committee comprising of global leaders in climate action to provide a roadmap and key recommendations to IFSCA for development of international sustainable finance hub at IFSC.
Listing of green and sustainable finance products in GIFT IFSC
The two recognised stock exchanges at GIFT IFSC namely India International Exchange (IFSC) Limited (“India INX”) and NSE IFSC are taking several steps to promote green finance in IFSC. India INX has signed a cooperation agreement with Luxembourg Stock Exchange with the objective to strengthen cross-border cooperation in sustainable finance. NSE IFSC has recently launched a dedicated platform i.e., International Sustainability Platform for listing of various categories of ESG related products.
These efforts led to a total listing of ESG labelled debt securities on IFSC exchanges amounting to USD 7.3 Billion with different labelled debt securities such as green, social, sustainable, and sustainability-linked bonds gaining prominence.
ESG Debt Securities listed at IFSC (Till March 2022)
Total Listed: USD 7.3 Billion (Breakdown across 4 ESG Debt Categories)
| Category of ESG Debt | Amount Issued (USD Million) | Volume in USD Billion | Share (%) |
|---|---|---|---|
| Green Bonds | 4,200 | $4.2 Bn | 57.5% |
| Social Bonds | 1,800 | $1.8 Bn | 24.7% |
| Sustainable Bonds | 600 | $0.6 Bn | 8.2% |
| Sustainability Linked Bonds | 700 | $0.7 Bn | 9.6% |
| Total ESG Debt Listed at IFSC | 7,300 | $7.3 Bn | 100.0% |
Way Forward: The 3Ps Strategy (Products, Policies, People)
Transitioning to net zero by 2070 would need massive funding in sectors such as solar power, green hydrogen, sustainable urban development, green transport, disaster resilient infrastructure and other projects related to climate adaptation and mitigation. For emerging economies such as India, the shift towards green needs to be balanced with the developmental requirements of the aspiring nation. The developed countries, in turn, have the responsibility to provide low-cost capital for meeting the transitional needs of India and developing nations.
IFSC can play a major role in bringing together the supply and demand for green financing. To achieve the aim of making IFSC a global hub for sustainable finance, there is need to focus on 3Ps – Products, Policies and People.
1. Products
For efficient and low-cost financing of green projects, there is a need to encourage products such as green bonds and green funds which have gained prominence based on international standards. Innovative products such as transition bonds and voluntary carbon credits can facilitate India’s transition towards low carbon economy. Mechanisms such as blended finance and risk sharing facilities can catalyse large private capital inflows into India and developing nations. IFSCA is actively engaged with multiple stakeholders to facilitate growth of new products that drives capital towards green financing.
2. Policies
Regulations and policies are important in development of efficient markets and maintenance of financial integrity. Disclosures and reporting are critical components in boosting investor confidence while raising capital for green projects. Regulations at IFSC are focused on adherence to international standards and provide increased disclosures for products related to green financing. New frameworks are being designed to encourage the development of new products and increase the proportion of financing into green categories.
3. People
There is a growing need for accredited professionals, for rating, certification and ESG reporting, to mitigate the risk of greenwashing. Large scale awareness programs and capacity building is necessary to develop the ecosystem of financial services related to green financing. There is a need for various stakeholder educational institutions, research organisations, international forums and networks to actively collaborate and develop the professional capacity of people in the area of green finance.
The Role of ICAI & Sustainability Reporting Standards Board:
ICAI can also play an active role in developing the capacity for sustainability reporting, and it is indeed encouraging to note that ICAI has set up a Sustainability Reporting Standards Board to help companies achieve their sustainability goals.
A thriving ecosystem needs policy makers, investors, issuers, rating agencies, financial intermediaries etc. to work in a concerted manner towards facilitating and promoting green finance. Green finance needs a sustained and a sincere effort and IFSCA is actively focused on facilitating its growth that would usher in a paradigm shift in the world of investment to achieve the common goal of mitigating climate change.
Official References & Regulatory Publications
- IFSCA Consultation Paper on Issuance and Listing of Securities Regulations: IFSCA Issuance and Listing Regulations.
- IFSCA Framework on Sustainable Financing for Banking Units and Finance Companies: IFSCA Sustainable Financing Framework (Report & Publication No. 28).