Green Finance in India

ESG considerations are increasingly influencing the deployment of investment capital, and there is a tremendous appetite for ESG financial products. Mandatory reporting standards, data and measurement will help to channelize intuitional green investments to India.

India has recently stepped up its climate ac on goals significantly beyond its previously set Nationality Determined Contribution (NDC) targets, committed to reach a non-fossil energy capacity of 500 GW and reduce the carbon intensity of its economy to less than 45 percent by the year 2030, and a Net Zero emissions target for the year 2070. At the same time India has also acknowledged that nearly $1 trillion needs to be mobilised as green finance towards achieving these goals.

India is a country of 1.3 billion people and the third largest emitter of greenhouse gases in the world, yet a growing economy with still expanding needs for infrastructure development. To achieve its climate targets and fund its green transition, India needs a large budget allocation, international finance from bilateral and multilateral sources and green private investments. India needs to improve its readiness to access and deliver climate finance from all available sources. This involves different aspects:

• Political and strategic readiness with a national green policy, planning and resource allocation,
• Creating investible projects, adopting measurement and disclosure standards, and
• Legal readiness to provide a framework that enables innovative financing structures and de-risking investment opportunities.

Policy interventions

Over the last decade, India’s policy efforts have achieved significant renewable energy deployment. India already generates 20% of its power requirements from renewable sources. Producing renewable energy has become more cost efficient and supply is available at competitive pricing. The recently introduced production linked incentive (PLI) scheme for solar panels will reduce dependence on imported components and allow supply chains to be more resilient. India also announced the ambitious ‘One Sun, One World, One Grid’ (OSOWOG) programme with the Green Grids Initiave (GGI) of the UK, which entails connecting clean energy grids across continents. This is an opportunity for India to par cipate across the global renewable energy value chain.

Incorporating net-zero targets into overall domes c policy and sector-based interventions, will provide regulatory clarity to investors to finance India’s plans for decarbonization and net-zero pathways to development. For example, transition to green mobility is quickly picking up with policy intervention and market response. The Faster Adoption and Manufacturing of Hybrid and Electric Vehicles scheme (FAME) and a Production Linked Incentive (PLI) scheme incentivises EV manufacturers and charging infrastructure providers, and different state governments have implemented their own EV policies and subsidies to promote e-mobility.

ADVERTISEMENT

Another challenging policy issue is of carbon taxation. Currently India has a coal cess penalising the use of coal and excise duty on petroleum products, and certain states have implemented green taxes within their territories. India could introduce a uniform carbon tax policy which would incentivise Indian companies to prefer alternative energy sources.

Disclosure and transparency

One of the barriers that India faces in accessing green finance, is the lack of a green taxonomy. Regulators in India have acknowledged that reporting asymmetry and the lack of a standardised global taxonomy are the key reasons for the relatively high cost of green bonds which have seen low interest from investors.

A green taxonomy would provide clarity on what activities qualify as ‘green’ and establish the eligibility criteria for green finance. Adopting such a taxonomy would reduce the chances of greenwashing and enhance investor confidence. A green taxonomy will also lead to attention towards sectors in need for investment taking away the sole focus from renewables which tends to garner the most align on in India. Additionally, it will ensure that regulators such as Securities and

Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) align their regulations with the taxonomy. While developing this taxonomy, policy makers could look at the green financing definitions as provided by Sustainable Banking Network (SBN); Principles for Responsible Investing (PRI); Carbon Disclosure Project (CDP); Sustainable Accounting Standards Board (SASB); OECD and UNFCC.

India’s environmental laws specify environmental impact assessment protocols, pollution standards, compliance and disclosure requirements for industries. However, the current environmental legal landscape is insufficient and needs to be augmented to bring in a strong climate transition plan which industries can follow, and regulators can use to regulate. National environmental regulations may also need to be strengthened to align with standardisation norms under a new taxonomy.

The standards for disclosure and sustainability reporting are still at a nascent stage in India. In May 2021, SEBI issued a sustainability disclosure norm, ‘Business Responsibility and Sustainability Reporting (BRSR) by listed companies’, which mandates the reporting of ESG performance by top listed 1000 companies with the largest capitalization. Over time the sustainability standards under BRSR may be made mandatory for all companies which will allow companies to be transparent with investors about their ESG practices.

Banks, insurers, asset managers, pension funds and global investors need to rely on data and metrics to make informed decisions on capital allocation and risk underwriting. In the Indian context, investors have had to rely on voluntary disclosures by companies, which are often incomplete, inconsistent, and subjective. The Bombay Stock Exchange offers a benchmark index, which assesses the ‘carbon performance’ of stocks based on quantitative performance parameters. This is a step in creating an inclusive market-based mechanism to promote energy efficient practices amongst issuers and attract green finance. However, India needs regulatory standardisation of climate disclosure and reporting, to enhance its credibility and negotiate for green finance. Mandatory reporting standards, data and measurement will help to channelize intuitional green investments to India.

Sources of finance

Raising green finance requires access to diverse sources of capital, public and private sector participation and appropriate financing structures. There is a need diversify financial assets and enable mobilization of private capital for sustainable development in India.

Green Bonds

In 2017, SEBI enabled raising capital through the issue of green bonds by Indian companies and mandated related disclosure norms broadly based on the Green Bond Principles framed by the International Capital Markets Association in 2014. Green bonds can be issued only for assets or projects with an environmental purpose such as renewable energy, clean transport, sustainable

water or waste management, energy efficiency and climate change adaptation, and funds raised need to be utilised entirely for the same purpose. The eligibility criteria is clearly demarcated and many companies may not be eligible to issue green bonds to support their clean energy transition if they have long investment cycles in carbon assets.

The uptake of green bonds has been slow largely due to the lack of a green taxonomy and an assessment and rating framework. Green bonds can be scaled up if the domes c bond market is made stronger, the existing regulations are made more inclusive, the use of proceeds criteria is broadened.

Credit enhancement methods through the creation of guarantee funds, issuing of sovereign green bonds, hedging support, and extending tax incentives to such bonds will further support the use of this instrument.

As of now Indian banks have only voluntary guidelines for responsible financing proposed by the Indian Banks Association, under which it is recommended that ESG factors be integrated into the investment, lending, and risk-management processes of banks. Preferring green investments in

central bank operations, relaxing prudential requirements for investment in green sectors, and including other green labels within priority sector lending (which is currently focused only on renewables) will unlock high amounts of domes c capital from Indian banks.

The Indian government announced the issue of sovereign green bonds in the years budget session which would be a useful tool to raise capital at reduced cost of capital for diverse green projects in different sectors, and further catalyse the deepening of India’s green finance market.

India’s International Financial Services Centre (GIFT City) would also provide a suitable framework to channelize foreign capital for sustainable financing as it provides a platform within India where foreign currency can be accessed with low tax impact, trading exchanges are available for all asset classes, and innovative financial products and structures for debt financing can be explored with regulatory support and transparency.

To encourage more foreign debt financing for green projects, it may be recommended to provide relaxations under the regulations applicable to external commercial borrowings and issuing of debt securities to foreign portfolio investors, such as relaxations from various restrictions of maturity period, use of proceeds, pricing caps, withholding taxes, concentration and single issuer limits in cases where the debt is being raised is for green projects.

Developing an internal carbon market

One of the key outcomes of the COP26 conference in November 2021 was the conclusion of the Paris rulebook which included the agreement of the fundamental norms which will govern carbon trading. This development will give a push to develop a domes c carbon market for emission trading in India. Currently India does not have an explicit mechanism for carbon pricing or market-based carbon trading.

A voluntary carbon market for the private sector may be developed by defining a mechanism for identifying quality carbon offsets, developing carbon accounting standards and a transparent pricing mechanism.

Blended Finance

Accessing finance for small scale and micro impact projects requires moving away from traditional public grants, institutional lending and philanthropic sources, and explore blended finance structures that allow strategic use of development finance from private investors for sustainable development.

Social impact bonds for climate transition can be used as a funding structure for small budget interventions at the district, municipal and state levels, which blends impact investing, public-private partnerships and outcome-based finance. Outcome based funding structures enable investors to provide upfront early risk financing to implement green projects. There is a need to incentivise more investors willing to provide such “first loss capital” to de-risk projects and catalyse further investments. Such incentives may be provided by offering more viable/investible projects where the outcome parameters are clearly defined, providing guarantee support to back stop unknown risks and providing regulatory relaxations to facilitate flexible funding structures.

Corporates and retail investors

Corporate funds can be a useful source for green finance. Indian company law mandates profit making corporates to allocate funds towards corporate social responsibility (CSR) activities which are unrelated to their own business. Many corporates choose to fund environmental causes as part of their CSR strategy, for example, afforestation or developing solar parks. There is potential for more concerted utilization of CSR funds towards climate and greater impact can be achieved by creating CSR fund pooling vehicles which specifically target climate mitigatio measures. However, certain compliance requirements under the CSR rules, parficularly the requirement to transfer ‘unspent’ CSR funds to specified government relief funds, could be inconsistent with the needs of climate projects which have longer gestation periods.

SEBI also recently launched the Social Stock exchange in India which provides social enterprises and social venture funds an alternate platform to raise funds from institutional and retail investors and attract CSR funding with transparency. Clarifications will be required under the Foreign Contribution (Regulations) Act to enable foreign investors to invest in social venture funds listed on the social stock exchange.