Green finance can bolster India’s transition to net-zero. Here's how

The effects of climate change are no longer subtle. The Earth's increasing temperature over the past few decades threatens every form of life, as much as it poses a risk to businesses and economies.

Although changes in climatic conditions can occur naturally, anthropogenic emissions of greenhouse gases (GHG) by humans have increased the rate of this change since the start of the 19^th century.

The United Nations Environment Programme predicts that global temperatures could rise over 3°C this century, if we continue business as usual. Such an upsurge in temperature has the capability to cripple economies, disrupt trade and development, and push more people towards poverty.

We are facing an estimated loss of around 10% of total economic value and up to 18% wiped off global GDP by 2050, according to the Swiss Re Institute.

This magnitude of loss in economic value doesn’t bode well for a country like India where the government aims to nearly quadruple the size of the economy to $10 trillion by 2030, from around $2.75 trillion at present.

Achieving this goal is a mammoth task, but the path gets tougher when climate change commitments are taken into consideration.

During the brainstorming session in Glasgow last year at COP26, Indian Prime Minister Narendra Modi committed to achieving net-zero emissions by 2070. As part of the five-pronged commitment “Panchamrit”, he also outlined a lofty aim for India to produce 500 GW of energy from non-fossil sources by 2030 and reduce carbon intensity to 45%.

The Prime Minister also committed to bring down projected carbon emissions by 1 billion tonnes between 2021 and 2030.

The goal, according to the Council on Energy, Environment, and Water (CEEW) will need investments upwards of $10 trillion in order to achieve net-zero by 2070. These investments would help decarbonize India’s power, industrial, and transport sectors. The CEEW also estimated that India could face a significant investment shortfall of $3.5 trillion in its net-zero ambition.

Banks would, and should, play a vital role in meeting these investment targets or plugging any gaps. Also, banking is a sector on the frontline – facing the impacts of climate change, as it is estimated that the financial services industry would account for a massive 72% of the total potential financial impact of the change.

The banking sector has been the backbone of India’s commercial activity through its transition into a major economic powerhouse. It is still a major source of funding for industries even though several other avenues, such as bond and equity markets, have grown exponentially alongside it.

Its role, therefore, as a major driver in mitigating the impact of climate change cannot be ignored. It is important for financial institutions to bolster the transition towards net-zero emissions through continued efforts in financing green infrastructure in the country. Although banks do not have a major direct role in climate change, as a financial institution it plays a backend role as financiers to industries.

Today, technology plays a pivotal role in net-zero transition for several sectors and is evolving rapidly. Some areas include electrifying transportation, making energy efficient buildings, reducing GHG emissions from the industrial and agricultural sectors, remaking the power grid to supply clean electricity, hydrogen fuel cells and expanding carbon capture, use, and storage – all of which require a strong financial boost of up to $ 2 trillion for a faster transition towards net-zero.

The Financial Services Taskforce (FSTF) of Sustainable Markets Initiative (SMI) suggests a gamut of strategies on how the banking sector can support these transitions, including benchmarking the definition of sustainable financing for further investments, undertaking scenario analysis, and assessing the risks and opportunities in sustainable financing mechanisms.

India acknowledged the importance of green financing in 2007. Subsequently, the Reserve Bank of India devised policies to encourage banks to align with sustainability goals. In 2015, the central bank included small renewable energy projects under the Priority Sector Lending scheme. In response, Indian banks devised internal policies to reduce their lending to carbon intensive sectors and adopt a green finance approach to credit. This has also led to some carbon-intensive sectors rethinking their business models and turning to green production methods.

According to data published by the Reserve Bank of India, aggregate outstanding bank credit to the non-conventional energy sector was around 365.43 billion rupees ($4.8 billion approximately), which was 7.9% of the outstanding bank credit to the power generation sector as of March 2020.

Banks have also been issuing green bonds with the objective of pushing work in economically sustainable projects. The value of these bonds, though, are small when compared with the total size of bond issuance in India. The country has issued green bonds worth around $8 billion since January 2018, or 0.7%, of total bonds.

Yes Bank and Axis Bank, for instance, were amongst the first banks to issue green bonds back in 2015-16.

Efforts, however, need to gather greater momentum. Although in the past few years, increase in awareness and policies have helped navigate the transition towards a greener tomorrow, there is no denying that Indian banks need to catch up.

Besides, keeping borrowing costs low and verifying sustainability claims would be a major challenge for banks in their journey to green financing. The answer to these challenges could well lie in banks’ ability to work with global financial institutions to provide the capital and structures, innovate new financing models relevant and specific to Indian challenges and harness the use of technology to accelerate the sustainability process.

To enable banks to operate and develop this sustainable ecosystem, the policy framework is of paramount importance. Fiscal measures such as a supportive taxation policy for green finance would help bring transaction costs down and promote better lending. Besides, India also needs green infrastructure investment trusts to facilitate deeper green bond markets, and green finance instrument innovation.

Lastly, it is the collective urge to make a sustainable change that will make a real difference. This requires the whole sector to step up. All sectors are interdependent and a nudge at one corner may not be enough. Making a holistic difference should take centre stage. Greater public awareness, information sharing, and constant research and development should help bring about the real shift.