India: Green Finance: Exploring The Indian Financial System

INTRODUCTION

Sustainable development is a key concept in environment jurisprudence that has aimed at harmonising economic development and environment protection. To combat the imminent threats of climate change various summits and conferences have based their plan of action on the lines of sustainable development. The 2030 Sustainable Development Goals (SDGs) are a unique set of seventeen-time bound goals that aim to balance all three objectives of sustainability i.e., economic, social and environment. Sustainability has emerged as a driving force for all sectors of the economy. The financial sector especially has been under the lens to contribute towards environment sustainability. In this backdrop 'green finance' has become a hot topic among corporates globally. Green finance means to include all public and private entities which provide financial assistance for sustainable development initiatives. A few of these initiatives include climate change, renewable energy, environmental pollution, deforestation and carbon neutrality. However, the context in which green finance is applicable depends on the economy of respective nations. Developed nations have the requisite economic resources to finance sustainability driven initiatives whereas developing countries face numerous challenges in financing their national goals. The Association of Southeast Asian Nation demand for green finance is estimated to hit three trillion US dollar in 2030¹. Back in 2009 at the UN Climate Summit held in Copenhagen, developed countries committed to aid hundred billion US dollar by 2020 for adapting and mitigating efforts in climate change. But the goal has not been achieved². The need for developed countries to financially aid developing nations was reiterated at CoP 26. In this article we will discuss how a developing nation like India is taking a step closer towards green finance.

NATIONAL EFFORTS

India has commenced its journey for carbon neutrality and put forward a 'Green Deal' to be achieved by 2070. The Green Deal has classified green finance as an enabler to accelerate decarbonisation. It emphasises on the need for an increase flow of capital from the national government and private entities to establish green infrastructure. It has devised four key focus areas to help accelerate the progress of green finance in India³. Firstly, a clear solid taxonomy provides a pathway for development of green projects and minimize transaction costs. Secondly, devising a framework for pricing carbon in India. Pricing of carbon will ensure that cost of climate change mitigation and adaption strategies will be brought into the mainstream investments. Thirdly use of national investments by including 'Green Infrastructure Investment Trusts (InvITs) which include markets for bonds and instruments for green finance. Lastly, stepping into global markets by minimising prevarication costs, guidelines for external borrowing and any other regulatory barrier that hinder green financing in India.

The Indian financial sector especially the banking sector has been at the forefront for the development of green finance. In 2007 the Reserve Bank of India ('RBI') had issued a notification⁴ stating the importance of banks and the need to make efforts in achieve sustainable development. In this backdrop reference was made to Equator Principles which provides a framework to recognize, manage and evaluate risks with regards to environment and society when monetizing projects⁵. In 2016, the RBI had the opportunity to release a report in collaboration with UNEP and India on the lines of sustainable financial systems. The report explores various facets of financial systems in India and its role in accelerating green finance. As a part of the legal framework the Companies Act, 2013⁶ mandates large capital companies to two per cent of their profits yearly to Corporate Social Responsibility (CSR) schemes which include environment sustainability, ecological protection, healthcare rural development and education. The Indian Government has put forward numerous schemes and funds to drive entities towards a greener production. Carbon trading has been introduced in the policy framework of the country through the 'Perform Achieve and Trade' scheme. The Government has also emphasised on sectoral development specifically renewable energy sector in its mission towards transitioning to green energy. The RBI has also supported lending for renewable projects by entities up to Rs. 15 crores and for private individuals the limit is up to Rs. 10 lakhs. In 2021 RBI joined as a member of the Network for Greening the Financial System ('NGFS') which is a cluster of nationalised banks that support transition to green economy through practices that promote the progress of environment and climate related risks in the financial sector⁷.

To drive business on the lines of sustainable practices SEBI has come out with various sustainable reporting standards time and again. The very first reporting framework was the 'Annual Business Responsibility Reporting' based on the national voluntary guidelines. One of the core elements of the principle included development of a system for environment management by businesses that could deter in damaging the environment while carrying out official operations. The 'Business Responsibility Report' is another reporting framework that aims at conducting the operations of entities in an environmentally sustainable manner. The framework provides a disclosure model that can be utilised by businesses in overlooking their performance in the reporting areas. The principle on 'environment' has eight guidelines to be complied by the entity. These includes; share of recyclable materials, total energy consumption, employment of energy saving methods and amounts of energy saved, water consumption and amount of water saved and recycled, greenhouse gas emission and reduction, treatment of water before discharging and rebuilding of biodiversity⁸. In 2021, SEBI took a leap ahead and put forward the 'Business Responsibility and Sustainability Report' (BRSR) to enhance disclosure in Environment, Social and Governance (ESG) standards. BRSR is applicable to top one thousand companies and is mandatory from financial year 2022-23. The BRSR framework utilises international ESG standards such as the Global Reporting Initiative (GRI) and the data presented is both qualitative and quantitative. It is estimated that ESG data in NIFTY 50 out of which forty per cent of private companies have large favourable record⁹.

According to the World Economic Forum the market for green bond could be worth more than two trillion dollars by 2023¹⁰. Green bonds are generally issued by government and private entities like any other bonds but the proceeds are utilised to finance projects that are eco-friendly and support net zero. India started investing in green bonds in 2015 with the aim to meet the capital requirement for green infrastructure. The Securities Exchange Board of India (SEBI) is the primary entity that regulates the issuance and requirements of listing of green bonds. From 2018-2020 the share of green bonds in the Indian financial market is just 0.7 per cent but is more compared to developed countries such as US, UK, Australia etc. The growth of green bonds in India has been exponential and has issued around six billion dollars in the first half of 2021. India is exploring offshore green bond funding which could help bridge the gap required to achieve net zero. A reputed think tank based in India estimates that the country will have to invest 10.103 trillion dollars to achieve the carbon neutral target by 2070. The target is set to achieve by two strategies- transition from coal to renewable energy and investing in technology driven by green hydrogen¹¹. Top renewable energy companies in India such as Adani, Power Finance Co., have issued green bonds with a maturity over ten years and the World Bank has also invested in Indian green bonds at various instances.

CONCLUSION

India has been on the journey for financing green project for over a few years now and rapid changes have been made in the financial system of the country to incorporate environmentally sustainable practices. Businesses drive the economy and sustainable methods in conducting business operations is significant in achieving carbon neutrality. With that being said the onus lies on the developed nations in aiding developing countries like India. Stringent efforts are being made such as the formulation of a new climate plan by Canada and Germany to provide hundred billion US dollars annually by inculcating an average of the finance generated from 2020-25. With respect to the Indian banking system, various national policies have been introduced to provide lending to carbon neutral industries and adopt environment friendly credit. As of 2021, ESG and green bonds have raised approximately seven billion US dollars as compared to over one billion in 2020¹². There is a need to emphasise more on the awareness related to business risk in an event of non-compliance of environment due- diligence. At this juncture lawyers and law firms step in for providing legal expertise on sustainable finance and regulation of financial services.

Footnotes

1. Gilman, J. (n.d.). Accelerating SDG Implementation through Green Finance. UN Environment. Retrieved February 22, 2022, from https://events.development.asia/system/files/materials/2019/11/201911-accelerating-sdg-implementation-through-green-finance.pdf

2. Pill, M. (n.d.). Glasgow CoP26: Climate finance pledges from rich nations are inadequate and time is running out. Down To Earth | Latest News, Opinion, Analysis on Environment & Science Issues | India, South Asia. Retrieved February 22, 2022, from https://www.downtoearth.org.in/blog/climate-change/glasgow-cop26-climate-finance-pledges-from-rich-nations-are-inadequate-and-time-is-running-out-80015

3. Mission 270: A Green New Deal for a Net Zero india. (n.d.). World Economic Forum. Retrieved March 1, 2022, from https://www3.weforum.org/docs/WEF_Mission_2070_A_Green_New_Deal_for_a_Net_Zero_India_2021.pdf

4. Reserve Bank of India - Notifications. (n.d.). Reserve Bank of India. Retrieved March 1, 2022, from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3987&Mode=0

5. The Equator Principles. (n.d.). Equator Principles Association. Retrieved March 1, 2022, from https://equator-principles.com/

6. Section 135 of Companies Act, 2013.

7. Reserve Bank of India - Press Releases. (n.d.-b). Reserve Bank of India. Retrieved March 1, 2022, from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51496

8. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business . (n.d.). Ministry of Corporate Affairs, Government of India. Retrieved March 2, 2022, from https://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf

9. Sultana, K. P., Nasrin. (2021, December 22). Indian companies finally jump on the ESG bandwagon. Mint; mint. https://www.livemint.com/companies/news/indian-companies-finally-jump-on-the-esg-bandwagon-11640194380818.html

10. Fleming, S. (n.d.). What is green finance and why is it important? | World Economic Forum. World Economic Forum. Retrieved February 21, 2022, from https://www.weforum.org/agenda/2020/11/what-is-green-finance/

11. Isjwara, R., & Ahmad, R. (n.d.). India sets sights on record green bond issuance entering 2022 | S&P Global Market Intelligence. S&P Global. Retrieved March 2, 2022, from https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/india-sets-sights-on-record-green-bond-issuance-entering-2022-67940627

12. Tewari, H. (2021, December 1). ESG, Green bond issues rise sharply in 2021 as Indian firms promote sustainable business - The Financial Express. The Financial Express. https://www.financialexpress.com/industry/banking-finance/esg-green-bonds-issue-rise-sharply-in-2021-as-indian-firms-promote-sustainable-business/2379438/

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