By Suteekshna Dubey
Abstract
India ranked third in the world for greenhouse gas emissions in 2021, behind the United States and China, with approximately 3.9 billion CO2 equivalent tonnes. However, the country’s GHG emissions per capita were only 2.8 CO2 equivalent tonnes, compared to a global average of 6.9 and 17.5 in the US. India, one of the biggest greenhouse gas polluters in the world, needs to budget more than $10 trillion to reach its goal of net zero emissions by 2070. Green finance refers to sustainable or ethical financing that efficiently funds initiatives that have a positive impact on the environment, such as cutting greenhouse gas emissions, increasing energy efficiency, or strengthening the circular economy.
Green Financing Instruments
International banks have recently begun to offer green loans with advantageous terms to companies that make investments in environmentally friendly initiatives. Debt securities, like green bonds, are purchased by institutional and other investors to fund eco-friendly projects. Start-ups and early-stage businesses that prioritize sustainability and minimizing their negative social and environmental effects are aggressively sought after by venture capital firms and private equity investors.
Some types of Green Financing are:
· Green Mortgages
When a buyer decides to invest in improving a property’s environmental performance or if the property has a high environmental sustainability rating, they enable lenders to offer better conditions to home buyers.
· Green Loans:
These loans are intended to finance energy-efficient projects, electric cars, home solar panels, and other environmental efforts.
· Green Credit Cards:
Every time a consumer uses one of Aspirations’ Zero credit cards or other green credit cards, a tree is planted. They give clients the option to allocate their spending towards green financing to make a long-lasting impact on the environment.
· Green Banks:
While they use public funds to encourage private investment in renewable energy and other environmentally beneficial projects, Green Banks function similarly to ordinary banks. A 2020 study claims that between 2011 and 2020, there were 20 green banks in the US, investing $7 billion in renewable energy.
Rise of Green Bonds
Bond-issuing firms will receive higher credit ratings as reporting standards like the Business Responsibility and Sustainability Report (BRSR) take form, which will increase the market for these financial instruments.
The Indian government on 1st February 2022, expressed issuing sovereign green bonds to raise funds for environmentally friendly infrastructure. The money raised will go towards public sector initiatives that lessen the economy’s carbon footprint. India released the first tranche of its first sovereign green bond, valued at INR 80 billion, on 25 January 2023. The Indian government declared on 9th February 2023, that it would be issuing an additional INR 80 billion in sovereign green bonds.
Globally, the green bond market could be worth $ 2.36 trillion by 2023. What qualifies as a green bond is defined by a code of conduct. A bond needs to follow guidelines about how proceeds are to be used, have a procedure for assessing and choosing projects, make sure that any proceeds are managed properly, and provide thorough reporting. The top three countries that issue green bonds are the US, China, and France. Even though it only began purchasing corporate bonds in 2016, the European Central Bank currently owns over 20% of all euro-denominated green debt, indicating that the bank views this as a means of advancing its own green agenda. The Swedish Riksbank has started selling bonds from several Australian and Canadian provinces in order to reduce its assets dependent on fossil fuels.
Green bonds and other financing instruments are new concepts that still need ratification and detailed legislation to regulate and implement on a wider scale, but these initiatives are a step ahead in realizing the responsibilities of corporations and also form part of major corporate governance.
Government Policies and Green Financing
According to research on financial restrictions in the sector by the Ministry of New and Renewable Energy, India needs to receive between INR 15,000 crores and INR 20,000 crores of Foreign Direct Investment (FDI) annually for renewable energy alone. In order to solve this, the government has approved 100% FDI each year for projects involving the production and distribution of renewable energy. The government’s investment arm, Invest India, states that renewable energy projects with a combined value of $196.98 billion are now underway.
In addition to national and local government organizations, foreign organizations like the World Bank and Asian Development Bank (ADB) have boosted their financing for environmentally friendly projects in India to close the funding gap in the private sector for renewable energy and to win over more partners.
The Reserve Bank of India has established guidelines for banks and non-bank financial institutions (NBFCs) to take “green deposits” in light of the government’s goal for sustainable development and the growing need among investors and businesses to establish stringent sustainability credentials. The goal is to guarantee that discoveries are applied to clean transportation, energy efficiency, green architecture, sustainable water and waste management, and the preservation of land and aquatic biodiversity.
The ESG category of mutual funds was introduced by the Securities and Exchange Board of India (SEBI), India’s asset management firms are now able to introduce multiple ESG funds, and when these metrics are reported on more rigorously and transparently, investor confidence will grow. With the help of the UN Environment’s resource efficiency program, nations will be able to review their financing system policies and regulations, develop sustainable finance roadmaps, and receive guidance from central banks and regulators on how to best bolster the legal framework of their home markets. Additionally, the program will support leaders in the private sector and multi-country policymakers in connecting with green economy initiatives. Additionally, UN Environment will spur legislative initiatives that educate and motivate both public and private investors.
India has committed to decreasing its economy’s emission intensity by 45% from 2005 levels by 2030 and raising the proportion of non-fossil fuel-based energy resources to half of the installed capacity as part of the Paris Agreement. The nation requires annual investments of about $170 billion to pay for these and other obligations. However, expected climate financing flows have fallen short, averaging only $44 billion annually. Governments in and around the world have been incorporating these initiatives based on the expenditures that are incurred in achieving sustainability goals. Green financing has been identified as one of the major contributors to raising awareness about the SDG goals and international bodies like the UN have been actively participating in establishing a friendly regime where these initiatives are not maligned by the corporatocracy.
Corporate Sustainability Initiatives
Companies in the private sector are funding green initiatives because they perceive the possibility for long-term benefits and favorable effects on the environment. Green, yellow (solar), and blue (marine) bonds are among the Green Social, Sustainability, and Sustainability-linked (GSSS) bonds that are progressively becoming more and more popular. As of January 2023, GSSS-linked debt instruments made up US $20 billion of the debt market in India, according to research published by Fitch Ratings.
India brought attention to the necessity of increasing financial flows to developing nations in order to support their efforts to combat and adapt to climate change during the 27th United Nations Conference of Parties (COP) in Egypt. The Indian government moved quickly after the COP to mobilize private sector funding for its own needs.
Green Financing and the Transition to a Low-Carbon Economy
Achieving a green economy or a law carbon footprint would require significant amounts of new capital investment, particularly in the form of green financing, to fund initiatives aimed at reducing greenhouse gas emissions and helping businesses adjust to the effects of climate change. Everyone benefits economically and environmentally from green finance. It equalizes the shift to a low-carbon society by increasing access to environmentally friendly products and services for both individuals and businesses, leading to more inclusive growth on the social front. As a result, there is a “great green multiplier” impact that benefits the environment and the economy, benefiting everyone.
Companies that participate in more green finance might increase the value of their portfolio. It gives their business a competitive advantage and draws in more eco-aware investors and clients. Mutual funds and exchange-traded funds are available that allocate their investments to businesses or initiatives that positively influence the environment. Individuals or organizations can support environmentally friendly efforts and get a financial return on their investment by investing in sustainable investment funds.
The implementation of sustainable energy sources can be achieved by strategically aligning planning approval, capital availability, and strategic priorities. To make such projects more appealing than, say, energy infrastructure created from fossil fuels, they could be granted preferential consideration.
Conclusion
As the world grapples with the urgent need to combat climate change and transition to a sustainable, low-carbon economy, green financing has emerged as a pivotal solution. India, despite being a significant greenhouse gas emitter, is actively embracing green financing instruments and government policies to accelerate its shift towards a greener, more sustainable future. The global commitment to environmental responsibility and corporate governance. By channeling investments into projects that reduce emissions, increase energy efficiency, and promote sustainability, green financing not only benefits the environment but also offers economic advantages to businesses and investors. As nations work to fulfill their climate commitments, green financing serves as a crucial catalyst for inclusive growth, aligning economic prosperity with ecological preservation. It is a testament to the collaborative efforts of governments, organizations, and individuals worldwide in building a more environmentally conscious and economically viable world.
Author’s Bio
Suteekshna Dubey is a final-year law student (three-year LL.B.) at Jindal Global Law School. She is interested in changes in industrial, energy, and technology sectors, affecting public policy.
Image Source: https://www.thestar.com.my/business/business-news/2022/01/15/green-finance-is-red-hot
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