Introduction

India experienced its hottest February in 2023, and climate change is expected to make extreme weather events worse. As the world’s most populous country, India’s carbon intensity affects global emissions. It is the third-largest emitter after China and the United States. The Constitution mandates environmental protection, and the government launched the National Action Plan on Climate Change in 2008 to reduce emissions and improve energy efficiency. 

India plans to reduce its emission intensity by 45% by 2030 and increase non-fossil fuel-based energy resources, the climate targets that India submitted under the Paris Agreement (Paris Climate Accords, 2015), to half of the installed capacity. 

“To finance these and other commitments, the country needs around $170 billion per year in investments. However, with an average of $44 billion per year, estimated climate finance flows have fallen short”, according to a report by the World Bank, in the year 2023. Thus, necessitating financing solutions for no or low-carbon-emitting and environment-friendly projects.

What is Green Financing?

According to the UN Environment Programme – “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.”

In layman’s language it refers to, financial products and services that are designed to help address environmental factors and climate-related risks. This includes sustainable investments such as renewable energy, green bonds, green technologies, and energy-efficient infrastructure. The goal of green finance is to provide capital for projects that can help reduce carbon emissions and promote a more sustainable environment and economy.

What is ESG and the difference between ESG and Green Financing?

ESG, or environmental, social, and governance, is a framework for evaluating a company’s sustainability and social impact. Sustainable finance, also known as ESG finance, considers these factors when making investment decisions. Investors can use ESG to evaluate a company’s long-term sustainability and risk profile and can include investments in companies with strong environmental and social performance or sustainable development projects.

Although both green finance and ESG have a common focus on sustainability, they differ in their approaches. Green finance’s primary aim is to provide financial assistance to sustainable projects and technologies. On the other hand, ESG assesses companies based on their corporate sustainability practices and governance structures.

Another difference between the two is that green finance is mainly concerned with environmental and climate-related risks, while ESG takes a more comprehensive approach and considers social and governance factors as well.

It is worth noting that there is some overlap between the two concepts. For instance, a company with strong ESG practices may be more likely to receive funding from green finance investors. 

What are the most popular types of Green Financing in India?

1. Green Sovereign Bonds
2. Green Deposits

Green Bonds and/or Sovereign Green Bond

According to the World Bank, Green bonds are a type of debt security that is issued to raise funds for initiatives that are related to the environment or the climate. Governments, companies, and multilateral organisations issue green bonds to exclusively finance projects that have positive environmental or climate benefits, such as renewable energy, clean transportation, and green buildings. Investors receive fixed-income payments in return.

As part of the Indian government’s market borrowings for 2022-23, sovereign Green Bonds will be issued to mobilise resources for green infrastructure. The proceeds from the same will be utilised in public sector projects that can help reduce the carbon intensity of the environment and economy.

National governments plan to issue sovereign green, social, and sustainability bonds worth a total of $111 billion by 2024. 

Greenwashing refers to the act of making false or misleading statements about the environmental benefits of a product or practice. It can enable companies to continue or expand their polluting practices while taking advantage of consumers who prioritise sustainability.

Green Deposits

Green deposits are a type of financial product that banks and financial institutions offer to promote environmentally sustainable initiatives and projects. These deposits are created to attract funds specifically for financing green and sustainable projects, such as renewable energy, energy efficiency, waste management, and other environmentally friendly initiatives.

There are several types of green deposits to choose from, including fixed deposits (FDs), savings deposits, recurring deposits, and certificates of deposits. Each of these deposits offers different features and benefits, enabling individuals and organisations to select the most appropriate option based on their investment objectives and personal preferences.

Banks that accept green deposits are required to inform the Reserve Bank of India (RBI) about how they will invest the funds. This increases transparency and ensures that the money goes towards its intended cause, thereby boosting investor confidence. 

Green fixed deposits offer –

They offer assured returns and may vary in tenure from 18 months to 10 years.

They allow investors to earn fixed interest for a fixed period, with funds channelled toward projects focused on renewable energy, clean technology, or other environmentally beneficial initiatives. 

These investments can include financing solar power projects, wind farms, organic farming, energy-efficient infrastructure, etc. Many financial institutions in India, including HSBC and HDFC, offer green FDs to both individuals and corporations. These FDs are focused on sectors such as renewable energy, clean transportation, pollution prevention, green construction, and sustainable water management.

Eligible depositors can get up to 7% or more interest rates. Green FDs are open to all individuals who meet the eligibility criteria set by the bank or the financial institution. The criteria for green deposits may differ among banks but usually include factors such as age, residency, and the ability to provide the required documentation. Premature withdrawal is permitted under specific terms, and deposits up to INR 5 lakhs are insured. Additionally, overdraft facilities can be availed against the green FDs, although they may be converted to regular FDs in such cases.

However, they may carry specific risks associated with the projects funded, such as regulatory changes or technological challenges. Before making an investment decision, it is important to carefully evaluate the terms, conditions, and interest rates.

What is the Green Credit’s Programme?

The Green Credits Programme, launched by the Environment Ministry in October 2023, aims to create a market-based incentive for different kinds of environment-positive actions. The programme is not limited to carbon emissions reduction.

Currently, Carbon credits have a market-based system at national and international levels. This system allows companies or nations to claim carbon credits if they take action to reduce their carbon footprint. These credits can be traded for money. Companies that are unable to achieve their emission standards buy these credits to improve their performance.

As a starting point, it is envisioned that private companies would buy these green credits as part of their Corporate Social Responsibility (CSR) obligations. Unlike the carbon credit markets, which focus more on industry and corporations, the Green Credits Programme can benefit individuals and communities as well.

Challenges associated with Green Financing in India 

1. Data mining, collection, and analysis – This can be a task as there’s a huge amount of data from various sources, especially when it comes to banks.
2. Issues related to compliance and reporting 
3. Issues related to providing high-quality customer service
4. Issues related to streamlining the investment process

A platform for processing this data is required. Hence, such automation can be processed through Data Fabric technology, which is an emerging field that helps provide a unified view of the data. 

Thus, this process automation technology will help reduce time and manage resources efficiently.