Opinion: Sustainability and Green Finance
The path for the future is to create awareness about green finance for sustainability by governments and private sector
By Prof T Prabhakar Reddy
We celebrated World Environment Day on June 5 by highlighting land restoration, stopping desertification and building drought resilience which necessitate climate action that needs huge sums of resources or ‘climate finance’. Climate action with climate finance should focus on reducing the impacts of climate change and environmental pollution while biodiversity should be preserved. Therefore, climate finance is interchangeably used with ‘green finance’ for ensuring sustainability which is a key issue.
Sustainability and green finance are not only interrelated but also intricately related as the former is dependent upon the latter insofar as meeting its timely funding requirements. Green financing is an apparatus that enables sustainability to remain a central concern and addresses issues like climate change, environmental pollution and biodiversity loss — the triple planetary crisis — and paves the way for sustainable development.
Green finance is the financing of environment-friendly activities, green technology and projects that preserve the environment towards achieving the Sustainable Development Goals. ‘Green finance is any financial assistance provided as a grant/loan from public, private and alternative sources for projects with the major objective of contributing to sustainability like promotion of green buildings, efficient management of energy, waste management, promotion of conservation of biodiversity (terrestrial and aquatic), renewable sources of energy and sustainable management of living natural resources and land use’. It also ensures a comprehensive development of sustainable projects and offers investors flexibility in risk management. The 2030 Agenda for Sustainable Development presupposes adequate resources for undertaking activities that promote Sustainable Development which is a universal agenda.
Nationally Determined Contributions
Prime Minister Narendra Modi made a pronouncement in Glasgow in November 2021 to address climate-related issues and enhance the quality of climate by implementing the following five elements of India’s climate action.
• Reach 500 GW of non-fossil energy capacity by 2030
• Generate 50% of India’s energy requirements from renewable energy by 2030
• Reduce total projected carbon emissions by one billion tonnes from now to 2030
• Reduce carbon intensity of the economy by 45% by 2030, over 2005 levels
• Achieve the target of net zero emissions by 2070
Initiatives of Government
The union Budget 2022-23 announced the issue of Sovereign Green Bonds to reduce the carbon intensity of the economy. The Department of Economic Affairs has designed a ‘Green Bond Framework’ in line with the green bond principles of the International Capital Market Association (ICMA). The principles include use of proceeds, project evaluation and selection, management of proceeds and reporting (Framework for Sovereign Green Bonds, GoI, 2022). The ICMA, to ensure transparency, recommended the issuer set out a Green Bond Framework which is accessible to the investor and advises the issuer to consider an external review.
A comprehensive national policy on green finance needs to be designed and implemented to achieve Nationally Determined Contributions
Further, the Green Deal of the government of India emphasises the need for an increase in the flow of capital from the national government and private sector to establish green infrastructure. The deal has devised four key areas to help accelerate the progress of green finance. Firstly, a clear solid taxonomy provides a pathway for the development of green projects and minimises transaction costs. Secondly, devising a framework for pricing carbon in India which will ensure that the cost of climate change mitigation and adaptation strategies will be brought into the mainstream investments. Thirdly, the use of national investments comprising Green Infrastructure Investment Trusts that include markets for bonds and instruments for green finance. Lastly, it is critical to enter global markets by minimising prevarication costs, designing guidelines for external borrowing and any other regulatory barriers that hinder green financing in India.
Sovereign Green Bonds
Although India’s climate actions have been largely financed from domestic resources, it is now targeting global financial resources plus transfer of technology as agreed under the UNFCCC and the Paris Agreement.
It is heartening to note that already Rs 5,000 crore worth of bonds were sold in the market with a tenure of five years in November 2023. Besides, Rs 10,000 crore worth of bonds with a tenure of 30 years in two tranches of Rs 5000 crore each were sold in February and March 2024. The government is contemplating issuing Rs 5,000 crore worth of bonds soon. It shows that the government is determined to mobilise the resources for financing green projects and working towards net zero emissions by 2070.
Green bonds accounted for a majority of Green, Social and Sustainability (GSS) bonds’ market size. As of 2021, the total size of the Indian GSS bond market stood at $19. 5 billion of which, green bonds alone accounted for $18.3 billion. The Ministry of Environment, Forest and Climate Change issued a notification in February to involve the private sector and corporates in environmentally sustainable activities. The Securities and Exchange Board of India (Sebi) has proposed ‘green credits’. Sebi introduced Business Responsibility and Sustainability Reporting (BRSR) in May 2021, which requires the top 1,000 listed entities by market capitalisation to file BRSR covering Environmental, Social, and Governance (ESG) perspective as part of the annual report from FY2022-23 onwards. In July 2023, Sebi introduced the BRSR core, a sub-set of the BRSR comprising nine Key Performance Indicators for several ESG factors that need to be assured.
Green Banking
The Reserve Bank of India (RBI) released a report in 2016 in collaboration with UNEP to explore various facets of financial systems in the country and promote sustainable financial systems. As per the Companies Act, large capital companies must contribute 2% of their profits on an annual basis to Corporate Social Responsibility’ schemes which include environmental sustainability, ecological protection, healthcare, rural development and education. Later, carbon trading was introduced in the policy framework of the government of India with a scheme called ‘Perform, Achieve and Trade’. It emphasised sectoral development, especially the renewable energy sector, in its mission towards transitioning to ‘green energy’. In 2021, the RBI became a member of the Network for Greening the Financial System, which is a cluster of nationalised banks supporting the transition to the green economy.
Under green banking, banks undertake initiatives and daily activities as a conscious entity by considering in-house and external environmental sustainability. These banks are known as ‘sustainable banks’ or ‘green banks’.
The green banking initiatives include; green loans, green financing, green mortgages, loans for green construction, loans for eco-friendly vehicles, automated cash deposit terminals, solar ATM and online payment channels. Green financing directly benefits the environment and indirectly the economy, and results in a healthy environment, efficient energy management and enhances eco-friendly projects.
The path for the future is to create awareness about green finance for sustainability by governments and the private sector, undertake policy research on mobilisation and utilisation of green finance, design a proper regulatory framework which can manage the scarce resources from misuse and bring about necessary law/ policy that can promote the mobilisation of green finance and ensure expenditures for the same and ultimately realise sustainability.
(The author is an Economist and Social Policy Consultant with UNICEF, Bangkok)
