Green finance is a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable economy. India which hopes to reduce its emissions intensity by 33-35 per cent by 2030 (from 2005 levels) and to make 40 per cent of its population rely on renewable energy in order to meet its Nationally Determined Contribution (NDC) goals, must rely on external funds to finance this green transition. In order to fund this green transition, the role of Indian banks and development financial institutions (DFIs) as a facilitator of green growth becomes integral.
According to Namita Vikas, Group President & Global Head, Climate Strategy & Responsible Banking, Yes Bank, “India’s ambitious NDCs and Sustainable Development Goals (SDGs) are estimated to cost USD 2.5 trillion and $8.9 trillion, respectively, by 2030. Mobilizing this enormous amount of climate and SDG finance would require the development of new and innovative financial mechanisms, and channelization of funds towards sustainable sectors and businesses that not only deliver on climate targets, but also meet the developmental agenda.”
There are several ways in which these banks and DFIs can contribute to green growth. Firstly, they can revamp their internal systems to move towards energy efficiency and move to e-transactions and e-statements, converting their buildings into green premises. Secondly, they can assess environment, social and governance (ESG) risks while appraising projects for financing, and thirdly, they can introduce green financial products such as green bonds. In Asia, the proportion of sustainable investing (i.e., investing that integrates ESG assessment in asset valuation) relative to total managed assets was small in 2014— at about 0.8 per cent, as compared to 50 per cent in Europe and Australia and 17-31 per cent in USA and Canada collectively. However with rise in renewable energy in India and increasing ESG assessment, the proportion of sustainable investing has risen since then considerably.
For the $200 billion needed to attain a target of 100 GW of solar power and 60 GW of wind power installation by 2022, the government has approached lenders such as Rural Electrification Corporation, Power Finance Corporation, Indian Renewable Energy Development Agency and Yes Bank for low-cost, long-term funds. Yes Bank has raised over Rs 1,000 crore by floating green infra bonds and Exim Bank has obtained $500 million through the issue of green dollar bonds, while IDBI is also set to attract global investors in this arena. The Reserve Bank of India has included renewable energy project financing as a part of priority sector lending category in July 2015. 2015 which was a major year for green finance also saw a record of $38.4 billion of green bonds issued globally, in order to finance low-carbon transport and eco-friendly projects, leading to many pensions funds and money managers in developed countries to look towards investing in socially responsible and environment friendly projects. In order to move to a low-carbon and climate resilient economy, it is integral that there is an adequate source of investment and private capital to support the commercialization of new technologies and to correct market failures through carbon. Energy efficiency in particular is often neglected by MSMEs due to limited access to technical know-how and appropriate financial products.
On behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) GIZ is tapping into these potentials by providing industrial MSMEs in selected regions of India with access to advisory services, training and financing schemes that enable them to implement energy efficiency measures. Some domestic institutions — like the National Bank for Agriculture and Rural Development, Small Industries Development Bank of India (SIDBI), Exim Bank, Yes Bank, Axis Bank — have their own exacting standards for green financing. As part of the Legislative framework, The Companies Act, 2013 mandates that larger companies should contribute at least 2 per cent of their average net profits annually towards Corporate Social Responsibility (CSR) activities, which again contributes to green financing. India is among the few countries in the world to have introduced a carbon tax. The clean energy cess imposed on coal mines in India or imported into India is collected into the ‘National Clean Energy Fund’ set up for funding research and innovative projects in clean energy technologies. The Government of India has also kept a plan outlay of Rs 10,192.83 crore in the annual budget plan for the year 2016-17 towards utilizing new and renewable energy resources of energy for supplementing energy requirements of the country in an eco-friendly and sustainable manner.
The challenge, before developing economies like India is to mainstream green finance so as to incorporate the environmental impact into commercial lending decisions while simultaneously balancing the needs of economic growth and social development. Green finance is a core part of low carbon green growth because it connects the financial industry, environmental improvement and economic growth and all these are essential for country like India to sustain in long run. In June 2017, Yes Bank, India’s fourth largest private sector bank, and FMO (the Development Bank of the Netherlands), along with DEG (the Development Bank of Germany) and Proparco (the Development Bank of France), organized an investment symposium on ‘The Opportunity of Green Finance in India’, where the four banks signed a charter to champion green finance in India. Through the charter, the four banks committed to mobilize green investments, seize opportunities in India’s sunrise sectors, and contribute to achieving India’s NDC and SDG targets, towards climate change.
“Mobilizing new sources of investments like green bonds, credit enhancements and blended finance would be key interventions that would alter the trajectory towards achieving SDGs”, adds Vikas.