Green finance
- February 16, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Green finance
Subject: Environment
Section : Climate change
Context: Green finance is fast emerging as a priority for public policy.
Green finance
- Green finance refers to the financial arrangements that are specific to the use for projects that are environmentally sustainable or projects that adopt the aspects of climate change. Environmentally sustainable projects include the production of energy from renewable sources like solar, wind, biogas, etc.; clean transportation that involves lower greenhouse gas emission; energy efficient projects like green building; waste management that includes recycling, efficient disposal and conversion to energy, etc.
- Moreover, project defined sustainable under the disclosure requirement for Green Debt Securities include climate change adaptation, sustainable waste and water managements, sustainable land use including sustainable forestry and agriculture, and biodiversity conservation (SEBI 2017).
- In order to meet the financial needs for these types of projects, new financial instruments such as green bonds; carbon market instruments (e.g. carbon tax); and new financial institutions (e.g. green banks and green funds) are being established. They together constitute green finance.
- Rapid economic development is often achieved at the cost of environment. Dwindling natural resources, degraded environment and rampant pollution are hazardous to public health and pose challenges to the sustainable economic growth.
- In order to protect and substantially improve the environment, nations around the world have been increasingly focusing on the use of eco-friendly technologies. However, it requires appropriate incentive structure for increased allocation of funds towards setting up or adopting environmentally sustainable projects.
Public Policy towards Green Finance
1. International best practices
- Major flagship programmes like Principles for Responsible Investment (PRI), Equator Principles (EP) for financial institutions, United Nation’s Environment Programme (UNEP) and Statement of Commitment by financial institutions on sustainable development suggest ways for implementing green finance among the signatories. Several entities from India are signatory to these programmes.
- Sustainable Stock Exchange is an initiative that recommends the signatory countries’ stock exchanges to come up with stock price indices that track the stock performance of a set of companies operating in these countries, which are leaders in recognising the Environmental, Social and Governance (ESG) principles into their financing aspects .
2. Public policy in India
- India has started emphasizing on green finance as early as 2007. In 2008, The National Action Plan on Climate Change (NAPCC) was formulated with a vision to outline the broad policy framework for mitigating the impact of climate change.
- The Climate Change Finance Unit (CCFU) was formed in 2011 within the Ministry of Finance as a coordinating agency for the various institutions responsible for green finance in India.
- Security and Exchange Board of India (SEBI) made it mandatory for top 100 listed entities based on market capitalisation at BSE and NSE to publish annual business responsibility reports since 2012 and revised it from time to time.
- In May 2017, SEBI issued guidelines for green bond issuance specifying the disclosure requirements.
- In addition, the Ministry of Corporate Affairs imposed mandatory reporting of the progress on Corporate Social Responsibilities (CSR) under the Companies Act, 2013.
- In October 2017, Report of the Committee on Corporate Governance has proposed that the board of directors shall meet at least once a year to specifically discuss strategy, budgets, board evaluation, risk management, ESG and succession planning.
- Incentives/Subsidy
- The Government of India (GoI) offers 30 per cent of the installation cost of the rooftop solar panels as subsidy to the institutional, residential and social sectors in most states. In some of the special category states, the subsidy is up to 70 per cent of the installation cost.
- In addition, beneficiaries can avail a generation-based incentive wherein they can receive ₹ 2 per unit of generation, if the generation exceeds 1100kWh-1500kWh per year. Further, the excess power can be sold at a tariff set by the government.
- GoI launched two phases of Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme in 2015 and 2019, to enhance the flow of credit, reducing the up-front purchase price of all vehicles and developing the infrastructures (such as charging stations) to encourage green vehicle production and sales.
- In order to counter the high up-front cost of such vehicles, the State Bank of India has introduced a ‘green car loans’ scheme for electric vehicles with 20 basis points lower interest rate and longer repayment window, compared to the existing car loans .
- The Government has also brought in a Production Linked Incentive (PLI) Scheme for manufacturing of high efficiency modules in the arena of renewable energy.
- RBI has included the small renewable energy sector under its Priority Sector Lending (PSL) scheme in 2015. Under this scheme, firms in renewable energy sector are eligible for loans upto ₹ 30 crore (increased from ₹ 15 Crore since September 4, 2020) while the households are eligible for loans upto ₹ 10 lakh for investing into renewable energy.
- Reserve Bank has mentioned the findings of the G20 Green Finance Study Group (GFSG14) on the need for development of local green bond markets, facilitating cross-border investments in green bonds, knowledge sharing on environmental risks, and improving overall green finance activities. The annual report further mentions definition of green activities, aspects of intellectual property rights in development and transfer of technology from developed countries, and environmental risk assessment by the banks.
- In the context of green financial institutions, Indian Renewable Energy Development Agency (IREDA), a government-backed agency for promoting clean energy investments, announced plans to become India’s first Green bank in May 2016.
- India Infrastructure Finance Corporation Limited (IIFCL) also launched a dedicated scheme known as the ‘credit enhancement scheme’ for funding viable infrastructure projects with bond tenors above five years.
Progress of Green Finance in India
- Green lending
- As at end-march 2020, the aggregate outstanding bank credit to the non-conventional energy sector was around ₹36,543 crore, constituting 7.9 per cent of the outstanding bank credit to the power generation compared to 5.4 per cent in March 2015.
- Green bonds
- Green bonds are the bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable
- India started issuing green bonds since 2015. As of February 12, 2020, the outstanding amount of green bonds in India was US$16.3 billion India issued green bonds of about US$8 billion since January 1, 2018, which constituted about 7 per cent of all the bonds issued in the Indian financial market.
- Around 76 per cent of the green bonds issued in India since 2015 were denominated in US$.
- Most of the green bonds issued since 2015 had maturities of five years or above, but less than 10 years.
Challenges in Green Finance
- RBI acknowledges the challenges in the development of green finance, such as “greenwashing” or false claims of environmental compliance, plurality of definitions, maturity mismatches between long-term green investment and short-term interests of investors.
- Borrowing costs: The cost of issuing green bonds has generally remained higher than the other bonds in India. It may be mentioned that most of the green bonds in India are issued by the public sector units or corporates with better financial health.