Green Finance

Context: Preliminary estimates conducted for Paris Agreement suggest that at least US$ 2.5 trillion (at 2014-15 prices) will be required for meeting its climate change actions between 2015 and 2030 (Government of India, 2015). India’s ambition of generating 175 gigawatts of renewable energy by 2022 also entails massive funding. The financial sector can play a pivotal role in mobilizing resources and their allocation in green activities/projects. Green finance is also progressively gaining traction in India. However, there are some challenges to green financing in India.

Challenges to Green financing:

  • Lack of clear definition: There is no clear-cut definition for “Green Finance” in India. Various terms such as Climate finance, sustainable finance is used interchangeably with green finance. It led to misunderstanding among stakeholders and made it problematic to keep track of capital invested in green sectors. 
  • Green Washing: Greenwashing is the practice of channelling proceeds from green finance towards projects that have negligible environmental benefits and providing misleading information to the investors and public about the environmental impacts of the company. Such practises discourage green financing. 
  • Failure to internalize externalities: Infrastructure investments in India didn’t efficiently internalise the environmental externalities (Positive externalities are benefits arisen to third parties due to green investments and negative externalities are damages inflicted on third parties due to polluting investments). This resulted in insufficient capitalization of “green” projects and excessive investment in “brown” projects.
  • Maturity mismatches: Generally green projects require long-term financing with low returns in the initial years. This results in mismatch between long-term green investment and relatively short-term interests of investors.
  • Information asymmetry: Lack of information on commercial viability of green technologies and uncertain policies on green investments resulted in risk aversion by investors in projects of renewable energies

Government’s Steps:

  • Sovereign green bonds
    • Sovereign green bonds are fixed interest-bearing financial instruments issued by any sovereign entity / inter-governmental organisation /corporation. The proceeds of these bonds are used only for environmentally conscious, climate-resilient projects.
    • The Reserve Bank of India (RBI) recently auctioned its maiden sovereign green bonds worth ₹8,000 crore under its Sovereign green bond framework.
    • There is no cap on foreign investment in these bonds because these instruments are considered as specified securities under the fully accessible route.

Green deposits: With a view to fostering and developing green finance ecosystem in the country further, RBI has put in place a Framework for acceptance of Green Deposits by the banks.

What are Green Deposits?

  • A green deposit is a fixed-term deposit for investors looking to invest their surplus cash reserves in environmentally friendly projects. Green bonds used to be the most common fixed-income ESG product in India earlier, and now products like green deposits are gaining significance.
  • Corporates looking for inclusion of a sustainability agenda into their treasury activities or those that have limited opportunities for investment in environmentally beneficial projects can invest in these green deposits.

Purpose of the framework:

To encourage banks to offer green deposits to customers, protect interest of the depositors, aid customers to achieve their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities/projects.

Key Guidelines:

  • Applicability: The provisions of these instructions shall be applicable to Scheduled commercial banks (excluding payment banks, RRBs), deposit taking NBFCs and Housing finance companies (HFCs)
  • The Banks shall issue green deposits as cumulative/non-cumulative deposits. On maturity, the green deposits would be renewed or withdrawn at the option of the depositor. The green deposits shall be denominated in Indian Rupees only.
  • The eligible banks shall put in place a comprehensive Board-approved policy on green deposits covering all aspects in detail for the issuance and allocation of green deposits.
  • Allocation of funds: The proceeds raised form the green deposits shall be allocated to the following activities

Projects involving nuclear power generation, generating energy from biomass and hydropower plants larger than 25MW are excluded from eligible projects. 

The banks shall ensure that the funds raised through green deposits are allocated to the eligible green activities/projects.

  • Third party verification: Allocation of funds raised through green deposits shall be subject to an independent Third-Party Verification/Assurance which shall be done on an annual basis. The third-party assessment would not absolve the bank of its responsibility regarding the end-use of funds.

A review report shall be published by the banks covering the details about amount raised under green deposits, amount of funding to the eligible green projects and third-party verification report.

  1. Which of the following statements about recently issued Sovereign Green Bonds is/are

correct?

  1. Sovereign green bonds are fixed interest-bearing financial instruments
  2. Only domestic investments are allowed to invest in these Bonds
  3. These bonds are issued at a premium and hence yields are higher
  4. Tax benefits are provided for investment in sovereign green bonds

Select the correct answer using the code given below:

(a) 1 only

(b) 1 and 2 only

(c) 1 and 3 only

(d) 2 and 4 only

Scroll down for answer

 

 

 

 

 

 

 

 

 

Answer: a

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