Green financing refers to an investment/ loan that is specifically for environmentally friendly projects. With rapid economic growth, degraded environment, rising population & rampant pollution, it has become the need of the hour. It includes several projects such as renewable energy, sustainable food, electric vehicles, resilient cities, etc. requiring collaboration between the government, corporates, and retail investors.

Green bonds refer to instruments developed to finance climate-related projects. In order to grow this market, the International Capital Market Association (ICMA) came up with its green bond principles in 2014 which are a set of voluntary guidelines to promote transparency & integrity in the green bond market. The principles bring the market towards consistent disclosures & reporting to facilitate transactions

In the following sections, we look at the green financing landscape in India.

Although India’s renewable energy capacity stands at 163 GW as of August 2022, it is aiming to achieve 500 GW by 2030, which will require a capital investment of ~US$ 213B. The Central Government launched an initiative called PANCHAMRIT to make India a net zero carbon emitter by 2070Some notable points regarding the flow of green finance in India in FY19/20

• Private players are investing more in energy efficiency sector to reduce their imports (& eliminating import duties). Also, they are getting incentivized by the govt to reduce the consumption of non-renewable resources.
• Transportation industry contributes ~14% of total greenhouse gas emissions in India & is expected to increase in future. That’s why clean transportation is the highest priority of the govt right now

Key challenges of green financing

Several systemic & structural issues contribute to the gaps in green finance which have been divided into two broad categories:

Project-based barriers: These include several regulatory & political risks which demotivate the investors. Emerging climate technologies with a green premium (extra cost of selecting clean technology) are quite expensive.

Investor-side barriers: Lack of projects which can meet the risk-return criteria set by certain investors. Also, need to make public transactions secure so that investors can transfer their money cautiously.

Green finance is rapidly becoming a key public policy imperative in India with increased awareness amongst the public in recent years. Improved coordination between different stakeholders with better information management systems is necessary to move towards sustainable economic growth.

Key highlights

• In 2022, India submitted its nationally determined contributions (NDCs) under the Paris Agreement which are a set of goals to reduce carbon emissions. To meet the NDCs, India’s current green finance flow is ~25% less than what is required across all sectors
• There is a need to set up the requisite infrastructure & diversify green funds to sectors like clean energy, EVs, etc. which will enable the inflow of international investments
• Green bonds are considered to be the best source to attain green finance goals but the provisions governing the same are vague which often repel the investors. Having a robust legal system related to green finance will help in identifying & classifying green projects
• Investments will give a boost to green projects which have the potential to generate employment opportunities. Through India's transformation to a net zero economy, ~50M employment can be created, with a projected contribution of US$ 15T