Green Financing in India

WU Executive Academy

Green financing is a financial arrangement specific to environmentally sustainable projects that adopt the aspects of climate change. Typical projects that fall under green financing are:

  • Renewable energy and energy efficiency
  • Pollution control and prevention 
  • Circular economy initiatives 
  • Biodiversity conservation
  • Sustainable use of natural resources and land

Diminishing natural resources, unrolled pollution and degrading the environment are problematic for public health and sustainable economic growth. Hence, eco-friendly technologies have increased, which requires incentivization and increased funding to adopt sustainable projects.

  • Renewable energy and energy efficiency
  • Pollution control and prevention 
  • Circular economy initiatives 
  • Biodiversity conservation
  • Sustainable use of natural resources and land

Diminishing natural resources, unrolled pollution and degrading the environment are problematic for public health and sustainable economic growth. Hence, eco-friendly technologies have increased, which requires incentivization and increased funding to adopt sustainable projects.

India’s Green Financing Journey

India has proactively emphasised green finance since early 2007.  RBI included lending to social infrastructure and small renewable energy projects in 2015, which has been a catalyst to green financing in India. Emphasis has also been given to the global regulatory framework which are:

  1. Sustainability disclosure by financial and non-financial companies (exposing ESG related risk from their operations)
  2. Directed and concessional lending 
  3. Micro and macro-prudential regulations 
  4. Establishment of green financial institutions 

While there have been increased interest, like in two years (2016-2018) India’s domestic private investors contributed to the largest share (63 per cent and 51 per cent for respective years) of about USD 18 billion through debt and equity and the government’s USD 9 billion for the 2 years, there is still a need of transformational upscaling of green financing in India across all low-carbon sectors to mitigate the effects of climate change in India. India is targeting producing 175,000 megawatts (MW) of renewable energy by 2022 and at present, the total installed capacity of renewable energy across India is 88,793.43 MW. According to the Indian ministry of environment, forest and climate change, India would require roughly Rs. 11 trillion per year, accounting for Rs. 162.5 trillion (USD 2.5 trillion) from 2015 to 2030, for effective climate action.

According to the Climate Policy Initiative (CPI) report, about 80% of the total green finance in the 2016-2018 period has gone towards the power generation sector (in line with the global trends). Solar power projects received nearly 41% of all funds in the two years, followed by wind energy generation at 23%.

8% of these funds were allocated towards Mass Rapid Transit Systems (MRTS) projects such as the Metro rail (expecting greater investment going ahead).

Progress so far

General awareness among the public has seen improvements. Considering the internet accessibility, the search activity and the overall search volume is much larger than it was in 2004 for topics such as green finance, green bonds, ESG, Corporate social responsibility, and renewable. 

Emphasis on green lending has also increased with steps like RBI, including the small renewable energy sector under Priority Sector Lending (PSL) scheme in 2015. The aggregate outstanding bank credit to the non-conventional energy sector stood at Rs. 36,543 crore, which constituted 7.9 per cent of the outstanding bank credit to the power generation.

Green bonds issued by any sovereign entity, inter-governmental groups or alliances, and corporates have been a tiny portion of the total bond issuance. Still, we can see big conglomerates participating in it in the future. Yes, the bank in 2015 issued green bonds making India the second-largest emerging green bond market. Most of it is used to fund renewable energy projects, but the overall issuance has been too small to meet the county’s green finance needs.

Challenges for India 

Significant challenges to India are high borrowing costs, false claims of environmental compliance, maturity mismatches between long-term green investment and relatively short-term interests of investors and plurality of green loan definitions. Most of the green bonds in India are issued by the public sector issuers. It has been evident that the private sector issuers of green bonds have reported lower debt to asset ratio on average compared to the non-issuers of green bonds.

Information asymmetry has been a critical issue for maturity mismatches, borrowing costs and leads to efficient resource allocation in this segment. Hence rectification in this would resolve a huge chunk of the problem. India has various reporting mechanisms like PAT (Perform-Achieve Trade) and RPO (Renewable Purchase Obligation) to monitor greenhouse gas emissions, but it lacks a national measurement, reporting, and verification platform for tracking climate finance.

There are humongous opportunities to be explored in this field, with increased coordination between environmental policies and investments, and an implementable policy framework for both national and state levels which includes favourable policy measures (which promotes deepening of corporate bond markets, consistent corporate reporting etc.)  would significantly contribute in addressing shortcomings of the green finance market.

Sources:

*04AR_2101202185D9B6905ADD465CB7DD280B88266F77.PDF (rbi.org.in)

What is green finance and why is it important? | World Economic Forum (weforum.org)

India needs massive increase in green finance for required climate action (mongabay.com)

India’s green finance needs are facing a persistent shortage (livemint.com)

What next for sustainable finance in India? – Grantham Research Institute on climate change and the environment (lse.ac.uk)

1576469077048_1.pdf (sebi.gov.in)

Infrastructure investment for USD 4.5 trillion a challenge:  Finance Minister Piyush Goyal- The New Indian Express