Green Finance: Aligning Profitability with Environmental Responsibility

“Explore the world of Green Finance, where profitability meets environmental responsibility. Learn about green bonds, loans, and investment funds driving sustainable development. Discover why green financing matters and how it’s gaining momentum globally. Stay informed on India’s transition to net-zero emissions through innovative green finance solutions. Join the movement for a greener and more sustainable future.”

Green financing could be promoted through changes in countries’ regulatory frameworks, harmonizing public financial incentives, increases in green financing from different sectors, alignment of public sector financing decision-making with the environmental dimension of the Sustainable Development Goals, increases in investment in clean and green technologies, financing for sustainable natural resource-based green economies and climate smart blue economy, increase use of green bonds, and so on.

Climate change has emerged as the defining political and economic problem of this century and it is likely to stay so for the foreseeable future. Governments, investors, businesses, and private individuals worldwide are beginning to take action in response to the climate issue, especially on decarbonization techniques. Moving to a low-carbon or green economy would need extraordinary levels of fresh capital investment, notably in the form of green financing, to support activities that cut Green House Gas (GHG) emissions and assist firms in adapting to the effects of climate change. That makes it important to understand what is green finance and how it matters.

What is Green Finance?

• Green finance is any structured financial activity that’s been created to ensure a better environmental outcome.
• Simply put, Green Finance is a loan or investment that promotes environmentally-positive activities, such as the purchase of ecologically-friendly goods and services or the construction of green infrastructure.
• Green finance refers to financial products, services, and investments that promote environmentally sustainable practices and support the transition to a low-carbon economy.
• It involves directing financial resources towards projects and initiatives that have positive environmental impacts, such as renewable energy, energy efficiency, sustainable agriculture, clean transportation, and waste management.
• As the hazards connected to ecologically destructive products and services rise, green finance is becoming a mainstream phenomenon.

It is to be noted that The European Central Bank is getting heavily involved in green finance and the top three green bond issuers are the US, China and France. 

Why Green Financing?

Green finance delivers economic and environmental advantages to everybody. It broadens access to environmentally-friendly goods and services for individuals and enterprises, equalizing the transition to a low-carbon society, resulting in more socially inclusive growth. This results in a ‘great green multiplier’ effect in which both the economy and the environment gain, making it a win-win situation for everyone.

The concept of green finance recognizes the role of the financial sector in addressing environmental challenges and advancing sustainable development. It encourages the integration of environmental considerations into financial decision-making processes, including lending, investing, and risk management.

Forms of Green Financing?

Green finance can take various forms, including:

• Green Bonds: These are fixed-income financial instruments specifically used to finance green projects. The proceeds from these bonds are earmarked for projects with environmental benefits, and investors receive returns from the bond’s interest payments.

• Green Loans: These are loans provided by financial institutions to fund environmentally friendly projects. These loans often come with favorable terms, such as lower interest rates or longer repayment periods, to incentivize sustainable investments. Typical projects that fall under the green finance umbrella include:
  • Renewable energy and energy efficiency
  • Pollution prevention and control
  • Biodiversity conservation
  • Circular economy initiatives
  • Sustainable use of natural resources and land
• Green Investment Funds: These are investment vehicles that specifically target environmentally friendly companies or projects. They enable investors to allocate their funds towards portfolios consisting of green assets or companies with strong environmental credentials.
• Green Credit Cards: Green credit cards such as Aspirations’ Zero card plant a tree every time a customer makes a purchase. They enable customers to direct their expenditure toward green finance in order to have a lasting impact on the environment.
• Green Banks: Green banks operate similarly to traditional banks, but they employ public funds to spur private investment in renewable energy and other environmentally friendly initiatives. According to a 2020 research, the number of green banks in the US increased from one to 20 between 2011 and 2020, investing $7 billion in renewable energy.

UN Advocates Sustainable Development for Green Finance

• For the United Nations, green financing plays an important role in delivering several of its Sustainable Development Goals.
• Its Environment team is already working with public and private sector organizations in an attempt to align international financial systems to the sustainable development agenda.
• Clean sources of energy can be brought to fruition through the right combination of planning consent, strategic priorities and availability of capital. Such projects could be given preferential treatment to make them a more attractive option than, for example, fossil-fuel derived energy infrastructure.
• UN Environment has been working with countries, financial regulators and finance sector to align financial systems to the 2030 sustainable development agenda – to direct financial flows to support the delivery of the Sustainable Development Goals.
• The main areas for the current work on green financing are:
  • Supporting public sector on creating enabling environment
  • Promoting public-private partnerships on financing mechanisms such as green bonds
  • Capacity building of community enterprises on micro-credit
• UN Environment through its resource efficiency programme will offer countries the service of reviewing their policy and regulatory environment for the financing system and developing sustainable finance roadmaps, and assisting central banks, regulators on how to best improve the regulatory framework of domestic financial markets to shape the way and supporting multi-country policy initiatives at sub-regional, regional and global level.

Green Finance Gains Momentum in India’s Net-Zero Transition

• Green finance is gaining traction in India as a key tool for transitioning to net-zero emissions. The integration of environmental factors into financial decision-making is essential for sustainable development. Initiatives such as green bonds, carbon pricing, and sustainable investment strategies are driving the shift toward a greener economy in India.
• In addition to the government and companies, there is growing interest from banks, non-banking financial companies (NBFCs), venture capitalists, and private equity (PE) funds in green finance opportunities. These stakeholders are recognizing the potential of green finance to generate financial returns while also contributing to environmental sustainability. The growth of green finance in India is being driven by a number of factors, including:
  • The increasing awareness of the environmental and economic costs of climate change.
  • The growing demand for sustainable products and services from consumers and businesses.
  • The development of new green financial products and services.
  • The government’s support for green finance through policies and regulations.
• India, being one of the top contributors to greenhouse gas emissions globally, faces the need for a budget exceeding US$10 trillion to achieve its net-zero emissions goal by 2070. The realization across the country is that the strategies to transition to ‘net zero’ will require significant investment.
• According to a report by the Ministry of New and Renewable Energy on financial constraints in the sector, India requires an annual Foreign Direct Investment (FDI) ranging from INR 15,000 crores to INR 20,000 crores specifically for renewable energy. To address this need, the government has granted approval for 100% annual FDI in renewable power generation and distribution projects.
• Currently, there are ongoing renewable energy projects worth US$196.98 billion, as stated by the government’s investment agency, Invest India.
• Recognizing the potential for long-term returns and positive environmental impact, private sector companies are actively investing in green projects. The market for Green Social, Sustainability, and Sustainability-linked (GSSS) bonds, which includes green, yellow (solar), and blue (marine) bonds, is gradually expanding. As of January 2023, GSSS-linked debt bonds accounted for approximately US$20 billion in the Indian debt market, according to a report by Fitch Ratings.
• With the establishment of reporting norms like the Business Responsibility and Sustainability Report (BRSR), companies issuing bonds are expected to observe an increase in their credit ratings, consequently expanding the market for such debt instruments.
• According to a report from the World Bank, the utilization of alternative and innovative energy-efficient technologies to maintain cool spaces presents an investment opportunity of around US$1.6 trillion by 2040.
• In addition to government agencies and domestic companies, international organizations like the Asian Development Bank (ADB) and World Bank have intensified their funding for green projects in India. Their aim is to bridge the gap in commercial investments in renewable energy and enhance the confidence of various stakeholders.

Prospective outlook of sustainable finance in India

• In response to the government’s emphasis on sustainable development and the growing importance for businesses and investors to establish strong sustainability credentials, the Reserve Bank of India (RBI) has implemented guidelines for banks and non-bank financial companies (NBFCs) to accept “green deposits.” These deposits are intended to ensure that funds are directed towards initiatives such as energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings, as well as terrestrial and aquatic biodiversity conservation.
• As the demand for green finance continues to rise, India is anticipated to witness an increase in innovative financing solutions and investment opportunities within the green sector.
• Recently, the Securities and Exchange Board of India (SEBI) introduced a specific Environmental, Social, and Governance (ESG) category for mutual funds. This allows asset management companies in India to launch multiple ESG funds. With improvements in reporting standards on these parameters, the enhanced rigor and transparency will foster investor confidence in ESG investments.

As we look forward to potential government initiatives regarding green financing, such as tax incentives for low-carbon technologies and policies supporting green financing instruments, it is equally crucial for private sector entities to embrace internal carbon pricing and encourage investments in green technologies and solutions.

In the nascent stages of development, green finance and other investment methods will eventually establish standardized definitions and measurement frameworks. This progress will enhance the assessment of performance and impact, enabling better comparisons and selection of funds and companies. The convergence of technology for emissions tracking, stricter reporting obligations, and improved governance will refine and enhance transparency in companies’ green credentials, alleviating concerns about greenwashing and bolstering investor confidence.

Enhancing transparency, standardization, and awareness of pertinent metrics and their influence on financial performance is imperative. As India ranks as the third largest emitter of CO2 and possesses a significant population, it both contributes to and benefits from this transformative process.

Although green finance alone may not provide a complete solution to environmental and social challenges, it plays a crucial role in promoting sustainable and responsible investment practices while encouraging companies to prioritize these issues. Effective implementation of innovative green financing mechanisms, facilitating the transition to a net-zero economy by 2070, necessitates collaborations between the government, academia, and industry, advocating for new policies, and fostering public-private partnerships.