Why do we need green finance so much?

Growing carbon footprint of industries has put sectors such as power and steel in the spotlight as major contributors to the climate crisis. The challenge of climate change can be tackled only by making our industries and businesses follow practices and processes that reduce their carbon footprint. That’s possible only with heavy investment that aids such a transition, and the solution lies in green financing.

What is green finance?
Green financing is to increase the level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities, as per the United Nations Environment Programme. A key part of this is to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability.

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.

Why we need green finance
India has updated its Nationally Determined Contributions (a climate action plan to cut emissions and adapt to climate impacts), aiming to reduce the country’s carbon intensity by more than 45% by 2030 from its 2005 levels. As per estimates by the International Finance Corporation, India will need around $403 billion in renewable finance by 2030 to achieve its renewable targets.

India’s sovereign green bonds
At initial stages, green finance needs a big push by governments. The Indian government has identified projects worth ₹25,000 crore that will be financed by proceeds from sovereign green bonds issued in the current fiscal and the next as part of its green-funding push. The projects already identified for green financing are largely in renewable energy and clean transportation segments.

The government had announced plans to raise ₹16,000 crore through green bonds in two equal tranches in the current fiscal, and the first tranche – the country’s first issuance of sovereign green bonds – in January drew a robust response, with orders exceeding the offer size of ₹8,000 crore by more than four times.

Credit rating agency Fitch had said that the inaugural sovereign green bonds issued by India reflected the growing policy focus to scale up domestic financing capacity on climate mitigation and adaptation.

According to the framework approved by finance minister, the sovereign green bonds will focus on financing public projects across nine areas including renewable energy, climate change, clean transportation, sustainable water and waste management, and pollution control. A green finance working panel, headed by chief economic adviser, has been mandated to select projects from the proposals submitted by various government departments.

Global green finance has also started chasing Indian companies, ET reported last month. Global development finance institutions and funds are ready to offer long-term support in the form of equity and debt at cheap rates to projects like solar energy and hydro power that help reduce the carbon footprint. In one of the recent deals, World Bank member International Finance Corporation (IFC) last week announced an about $50 million investment in a sustainability linked bond issued by Tata Cleantech Capital, which finances renewable energy projects.

Risks in green finance
As green finance is a new practice, it comes with risks too which need effective regulation of this sector.

Checking possible misuse of green finance is critical, Rajesh Gupta, managing partner at SNG Partners, a law firm specialising in green finance, told ET last month. “Checks and balances are required at an early stage to ensure compliance and avoid hoodwinking by any unscrupulous group,” he said. “Self-awareness on good governance and the intangible benefits on reputation and goodwill is a compelling reason for corporate India to become more and more ESG (environmental, social and governance standards) compliant.”

On March 8, RBI Governor said the central bank would soon issue guidelines for regulated entities to increase green lending, accept green deposits and mitigate risks related to climate change.

How businesses can benefit from green finance
Businesses that take to green finance can benefit in various ways. It can help them follow different environmental norms and regulations and thus avoid possible fines. Since climate change has gained huge public attention, adopting sustainable practices by relying on green finance enhances brand value and offers a positive differentiator.

Customers tend to prefer brands that adopt clear sustainable practices. The energy-efficient and other sustainable practices promoted by green finance also often help in saving costs thus boosting profitability of businesses.

Source: The Economic Times

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