As one of the largest contributors to greenhouse gas emissions globally, India needs a budget exceeding $10 trillion to achieve its net-zero emissions goal by 2070, as per Earnest & Young research. Various measures are being implemented in both the public and private sectors, leading to increased investment opportunities. One notable initiative is green finance, a sustainable form of financing that supports projects with environmental benefits, such as reducing greenhouse gas emissions, enhancing energy efficiency, and promoting the circular economy.
Since sustainability has become a national priority, cutting across policies and sectors, there is a growing awareness of the vital role played by green finance in India’s transition to a net-zero economy. However, the concept of green finance is still evolving and has taken different forms, including loans, bonds, and equity investments.
For instance, international banks are now offering green loans with favourable terms to businesses investing in sustainable projects. Institutional and otherwise, investors purchase debt securities like green bonds to finance environmentally friendly initiatives. Venture capital firms and private equity investors actively support startups and early-stage companies, focusing on sustainability and minimising environmental and social impact.
Despite being in the early stages, various organisations and policymakers are at different points in their sustainability journey. Nevertheless, there is a shared understanding that the strategies for transitioning to a ‘net zero’ economy will necessitate substantial investments.
Slow, But Steady
With Indian companies exploring various financing options for capital-intensive technologies like hydrogen or carbon capture, green finance is gaining momentum. According to a report by the Ministry of New and Renewable Energy, India needs Rs 15, 000 crores to Rs 20,000 crores for annual Foreign Direct Investment (FDI) in renewable energy alone. In response, the government has approved 100% annual FDI for renewable power generation and distribution projects, with ongoing renewable energy projects valued at $196.98 billion, according to Invest India.
Private sector companies are investing in green projects, foreseeing long-term returns and positive environmental impacts. The market for Green Social, Sustainability, and Sustainability-linked (GSSS) bonds, including green, yellow (solar), and blue (marine) bonds, is gradually expanding. As per Fitch Ratings, GSSS-linked debt bonds accounted for $20 billion in the Indian debt market as of January 2023.
As reporting norms such as the Business Responsibility and Sustainability Report (BRSR) take shape, companies issuing bonds are likely to receive higher credit ratings, further expanding the market for such debt instruments. According to a World Bank report, leveraging alternative and innovative energy-efficient technologies to cool spaces can create an investment opportunity of $ 1.6 trillion by 204o.
In addition to domestic government agencies and companies, international organisations like the Asian Development Bank (ADB) and the World Bank have increased their funding for green projects in India. This aims to bridge the gap in commercial investments in renewable energy and instill confidence among various stakeholders.
The Way Forward
In response to the government’s emphasis on sustainable development and growing interest among businesses and investors in establishing strong sustainability credentials, the Reserve Bank of India has issued guidelines for banks and non-financial companies to accept “green deposits”. The objective is to ensure that funds are directed toward activities related to energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings, and the conversation of terrestrial and aquatic biodiversity.
As the demand for green finance increases, India is expected to witness the emergence of more innovative financing solutions and investment opportunities in the green sector. In March 2023, the Securities and Exchange Board of India (SEBI) introduced an Environmental, Social, and Governance (ESG) category for mutual funds. Asset management companies in India are now permitted to launch ESG funds, and with improvements in reporting on such criteria, heightened scrutiny and transparency will enhance investor confidence.
While anticipating government initiatives related to green financing, such as tax incentives for low-carbon technologies and policy support for green financing instruments, it is equally crucial for private sector organisations to adopt internal carbon pricing and encourage investment in green technologies and solutions.
