Green finance needs thrust, says RBI Deputy Governor

The RBI deputy governor, M Rajeshwar Rao, has laid stress on the importance of bringing green finance into focus. As per news reports, the RBI deputy governor noted that there was a need to consider environmental impact in the commercial lending space.

As part of the RBI’s deputy governor’s address reported in the media, he noted that the central bank had advised Indian banks as early as 2007 to bring in an action plan that would contribute to sustainability. Further, in 2012, the RBI also brought in loans that could be issued by banks directly to persons setting up solar or other renewable energy installations in their households that were off the grid.

In 2015, the central bank extended its Priority Sector Lending (PSL) norms to bank loans of up to Rs 15 crore for borrowers looking at setting up power generators that were solar or biomass-based or windmills. This limit was extended to Rs 30 crore in 2020.

RBI is part of a central bank group focused on green finance

In the first half of 2021, the RBI joined a central bank, and financial supervisor group called the Network for Greening the Financial System (NGFS) to boost the green factor of the finance sector.

In an RBI report in 2019, the country’s central bank said that there is a need for policy action to set up a framework to promote green finance in India. The report also noted that green financing has faced challenges such as lack of a standardized definition of what a green loan includes, false claims when it comes to compliance, among others. The central bank had noted that there was a need to strengthen the corporate bond market and standardize terminology pertaining to green investments.

Green finance is the terminology used to describe lending practiced by banks and non-banking financial companies (NBFCs) both in public and private spheres towards sustainable and green development projects.

Growing thrust on ESG funds and green bonds

Green finance may also include green bonds and ESG funds, among others. ESG funds (environmental social and governance funds) are equities/bonds portfolios that factor in environmental and sustainability issues into their investment processes. Although the ESG funds in India are still in their early stage, the country drew Rs 3,686 crore for the fiscal year 2020-21, an increase of 76 percent from the earlier fiscal, according to news reports. According to a report in August 2021, India had 23 ESG funds compared to China, which has 119, and the US has over 500.

When it comes to the green bond market, India’s issuance of green bonds was around $7.7 billion in the period between 2012 and 2018, which made India the second-biggest issuer of green bonds in the emerging markets universe for that period, according to the RBI’s report on banking trends in India in 2018-19. China was the leader when it came to issuing green bonds, issuing over $108 billion for the same timeframe. Green bonds, at their heart, are debt instruments, like other bonds and finance projects or assets that are sustainable and have a positive impact on the environment. Capital markets regulator SEBI in 2017 issued regulatory guidelines to enable listing and issuance of green bonds.

Further, taking note of green financing and investment principles, SEBI in May 2021, notified fresh disclosure requirements on sustainability-related reporting for 1,000 companies listed in terms of market cap by FY2023. According to these norms, companies would need to present a summary of ESG risks and opportunities along with financial aspects. Sustainability reporting has been made voluntary for FY22 and will be made compulsory in FY23, news reports say.

As per a government report released in 2020, India has seen a rise in its average temperature, reduction in precipitation during monsoon occurrences, rise in extreme weather events and sea levels as well as severity and frequency of cyclones. It means that climate-related financial risks will crop up, the RBI deputy governor has noted. Climate-related financial risks are analyses, and assessments of possible climate change events, their consequences, and the responses to such threats.

India would need $2.64 trillion in investments to meet the UN’s sustainable development goals (SDGs) by 2030, according to a 2020 report.

Conclusion

The RBI deputy governor has stressed the importance of bringing green finance to the forefront at a time when India and the world are facing the threat of an increase in average temperatures and sea level rises. He noted that commercial lending-related decisions would need to factor in ecological impact.

FAQs

What is green finance?

Green finance is a term that refers to all financing of investments that cater to sustainable projects; its range includes green bonds, ESG funds either in the private or public sector.

What is a green bond?

A green bond is a debt or fixed-income instrument like other bonds that are designed with the aim of supporting any sustainable or climate-related assets or projects.