Green finance is gaining traction for net zero transition in India

Slow but steady

With companies in India exploring various financing options to support the development of capital-intensive technologies such as hydrogen or carbon capture, green finance is gathering speed.

India requires INR 15,000 crores to INR 20,000 crores of annual Foreign Direct Investment (FDI) in renewable energy alone, as per the Ministry of New and Renewable Energy’s report on financial constraints in the sector. To address this, the government has authorized 100% annual FDI for renewable power generation and distribution projects. According to the government’s investment agency Invest India, renewable energy projects worth US$196.98b are ongoing.

Private sector companies are investing in green projects as they see the potential for long-term returns and positive environmental impact. The market for Green Social, Sustainability and Sustainability-linked (GSSS) bonds, which includes green, yellow (solar) and blue (marine) bonds, is gradually expanding. According to a report by Fitch Ratings, GSSS-linked debt bonds accounted for US$20b in the Indian debt market as of January 2023.

As reporting norms such as the Business Responsibility and Sustainability Report (BRSR) take shape, bond-issuing companies will likely witness higher credit ratings, expanding the market for such debt instruments.

According to a World Bank report, keeping spaces cool using alternative and innovative energy-efficient technologies can open an investment opportunity of US$1.6 trillion by 2040.

Besides government agencies and domestic companies, international organizations such as Asian Development Bank (ADB) and World Bank have also increased their funding for green projects in India to reduce the gap in commercial investments in renewable energy and boost the confidence of various stakeholders.

Future of green finance in India

Given the government's push for sustainable development and the increasing need among businesses and investors to develop strong sustainability credentials, the Reserve Bank of India has introduced guidelines for banks and non-bank financial companies (NBFCs) to accept “green deposits”. The purpose is to ensure funds are utilized for energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings, and terrestrial and aquatic biodiversity conservation.

As the demand for green finance grows, India is expected to see more innovative financing solutions and investment opportunities in the green sector.

In March, the Securities and Exchange Board of India (SEBI) introduced an ESG category of mutual funds. Asset management companies in India can now launch more than one ESG fund, and as reporting on such parameters improves, the increased rigor and transparency will boost investor confidence.

While anticipating government action on green financing, including tax breaks for low-carbon technologies, policy pushes for green financing instruments etc., it is equally important for private sector organizations to adopt internal carbon pricing and promote investment in green technologies and solutions.

These are early days and as processes mature, green finance and other modes of investments will gain standardized definitions and measurement frameworks. Visibility in performance and impact assessment will improve the comparison and selection of funds and companies. The intersection of the use of technology in tracking emissions, tighter reporting requirements, and better governance will help fine-tune as well as improve transparency in companies’ green credentials, which will, in turn, strengthen investor confidence and quell fears of greenwashing.

There is a need for greater transparency, standardization, and education around relevant metrics and their impact on financial performance. India, as the third largest CO2 emitter and the most populous country, is a contributor as well as the beneficiary of this evolution.

While green finance may not be a silver bullet for addressing environmental and social challenges, it is critical to promote sustainable and responsible investment practices and encouraging companies to prioritize these issues. Government, academia, and industry collaborations, advocacy on new policies, and public-private partnerships is necessary to ensure the effective roll out of innovative green financing mechanisms to boost the transition to a net zero economy by 2070.

The article was first published in Business Insider India