Green Finance in India: Importance, Opportunities, Challenges & Key Initiatives

Globally, the paradigm of economic growth and development is undergoing a fundamental shift, and the reason is to make economic activities more environmentally sustainable. India, as the fifth-largest economy in the world, is charting an ambitious course towards becoming a global economic powerhouse. It is critically essential to harmonise this economic growth with India's commitment to environmental goals as a nation. 

This article discusses what green finance is in India and how it is serving as a significant enabler for a transition towards an environment-friendly, sustainable, and low-carbon economy.

The Importance of Green Finance for India

Green financing initiatives in India are crucial for multiple reasons, as they help accommodate the nation's economic and global aspirations. 

• Commitment to Net Zero emission targets - At the 26th COP (conference of parties) session in Glasgow, UK, India committed to achieving a 'Net Zero' emissions by 2070, along with adopting various other climate mitigation measures. It is a steep target for a country with the world's largest population. Green financing is critically essential to mobilise capital investments required to meet these commitments.  
• Inadequacy of conventional project financing models - Traditional finance models used to study project viability are extremely limited in scope to accommodate climate mitigation and climate adaptation measures. It makes sourcing funds for environment-sustainable initiatives difficult. For example, a simple DCF (discounted cash flow) study may not approve projects on urban waste management, clean transportation or resolving stubble burning issues. Green finance helps bridge the gap in project viability by channelling pro-environment investments towards such public and private initiatives. 
• Building self-reliance to meet growing energy demand - Capabilities to channel environmentally aware investors can help fund the heavy capital investments required in the renewable energy sector. It is essential to reduce India's dependence on non-renewable energy imports. 
• Preventing the negative impact of economic growth on environment - As the fifth largest economy, India is experiencing a rapid increase in urbanisation, energy consumption, mechanised farming and industrial activities. Maintaining this rapid growth is as important as minimising its impact on the environment. Green finances can help achieve economic growth without compromising environmental responsibilities. 

Key Components of Green Finance

The key components of the green financing ecosystem in India are:

1. Financial institutions - These are organisations prioritising the mobilisation of funds to finance environmentally beneficial and sustainable projects. 
2. Financial instruments - These include funds, loans and insurance products to support green initiatives and instruments of investments for the mobilisation of green funds. 
3. Green projects - They comprise environmentally beneficial or environmentally sustainable for-profit and for-purpose public and private initiatives. 
4. Supportive policy environment - It involves rules, regulations, guidelines and incentive mechanisms taken by the central and the state governments in India to promote other components of green finance in India.  

Some of the common financial instruments promoting green finance among Indian entrepreneurs and investors are: 

• Green bonds: These are fixed-income securities issued to raise capital to finance environmentally beneficial projects. 
• Green loans: Loans offered at preferential rates by financial institutions to public and private organisations and individuals. Examples are electric vehicle financing, loans for the installation of solar panels, etc. 
• Sustainability-linked green loans: These are green loans with predefined performance targets toward environmental sustainability. Borrowers are incentivised to achieve these targets. 
• Green funds: Investment instruments focused on companies with strong environmental, social, and governance (ESG) performance.
• Carbon finance: It involves incentivising businesses to reduce or trade off their carbon emission through trading of carbon credits. 
• Green Insurance: This emerging field offers insurance products that cover environmental risks and promote sustainable practices.

Government Initiatives and Regulatory Framework

The Indian central government and sector regulators have taken various policy decisions and rolled out supportive regulatory frameworks to promote green financing in the economy. The major initiatives are-

• SEBI (The Securities and Exchange Board of India) guidelines for the issuance of green bonds, enhancing transparency and credibility. 
• RBI declared renewable energy as a priority sector and mandated scheduled commercial banks to ensure lending to this sector.
• The government developed a framework in compliance with the ICMA international guidelines for the issuance of sovereign bonds. 
• IREDA (Indian Renewable Energy Development Agency) launched Sovereign Green Bonds in 2022. 

Green Bond Market in India

The green bond market in India has witnessed significant growth in recent years. A diverse range of entities, including PSUs, private enterprises and financial institutions, are participating in the market. The total issuance surpassed US$ 21 billion in February 2023, and over 80% of mobilised funds went to the private sector. Sovereign bonds and public green initiatives, like clean transportation and water conservation, accounted for nearly 14% of mobilised funds through green bonds. 

However, the market is still at its nascence considering the € 310 billion issuance of green bonds in Europe in 2023. It requires resolving some of the significant challenges the green bond market in India is facing

Opportunities and Benefits

A green financing ecosystem and India's transition to a green economy can open up a host of opportunities and benefits for PSUs and private businesses in India. 

• Brand reputation building - Indian consumers are becoming aware of environmental sustainability and are eager to embrace pro-environment products and services. Companies adopting sustainable business practices can gain a competitive edge in the market. 
• Attracting environmentally aware investors—An environmentally-friendly brand reputation can help companies attract mature investors with a long-term outlook and risk appetite. 
• Long-term cost efficiency - Despite high initial capital investments, climate mitigation and climate adaptive technologies and practices reduce operational costs in the long term and avoid regulatory risks. 

Challenges in Green Finance Adoption

Some of the major challenges that the adoption and development of the green financing ecosystem in India are facing: 

• Lack of standardised taxonomy on green bonds and green financing 
• Perception of high-risk investors associated with green energy projects (e.g., green hydrogen, offshore windmills, geothermal energy, etc.)  
• High costs of issuing green bonds in India due to a lack of scale 
• The very long gestation period of many green projects 
• Limited awareness and appetite of domestic investors for long-term commitments to green investments 
• Limited number of green projects with sizes and scales to justify cost efficiency 
• Tendency of 'green washing' among businesses without any significant value addition to environmental sustainability 

Green Finance in India: Success Stories

Several green initiatives are being taken in India, and many of them have proved successful already. Some of these successful green finance projects in India are: 

• ReNew Power - The project raised a significant portion of capital through green bonds to fund its wind and solar projects across the country.
• Delhi Metro Rail Corporation (DMRC) - It has mobilised funds by selling carbon credits as one of the most environmentally sustainable urban rapid mass transit systems globally. 
• Ghaziabad Nagar Nigam issued green bonds worth US$ 20 million in 2021. 
• Indore Municipal Corporation raised US$ 87 million in 2023 through green bonds. 

The status of green finance in India is definitely full of optimism on the back of regulatory support, policy-backed incentives and growing public awareness. It is essential to unlock the necessary investments to achieve India's climate goals and ensure the country's transition to a green economy. However, the journey has begun. The sector will require more concerted efforts and partnerships from public and private stakeholders.