Editorial Articles

Issue no 3, 16 - 22 April 2022


Green Financing: Key To Sustainable Growth For India

Amitabh Kant, Piyush Prakash, Madhuri Pal

India will remain the fastest-growing economy (in terms of real Gross Domestic Product (GDP) in the world during 2021 to 24 (Economic Survey, 2021-2022). Indian economy is set to become the fifth-largest economy (nominal GDP) by 2025 and the third largest by 2030. However, climate change poses a real serious threat to India's transition to a high-income economy. As per a World Bank report, rising temperatures and changing monsoon rainfall patterns from climate change could cost India 2.8 percent of GDP and depress the living standards of nearly half the country's population by 2050. In this backdrop, Green Financing appears to be a silver lining amidst India's march towards a developed economy. In this article we discuss the concept of green finance, its evolution in India, the impediments and way forward to drive the discourse on Green Financing for achieving the larger goal of Sustainable Development Goals 2030.

Green Financing: The Concept

Green Finance, as mentioned by RBI (2021) refers to the financial arrangements specific to the use of environmentally sustainable projects or projects that adopt the aspects of climate change. In other words, green finance is any structured financial activity built to provide better environmental develop-ment. Green Finance constitutes instruments such as green bonds, carbon market tools e.g., carbon tax, and new financial institutions such as green banks to promote the development of green undertakings or minimize the impact on the climate of more regular projects. In the increasing era of framing climate-friendly policies, green financing has emerged as the most innovative mechanism and is rapidly evolving as a priority for the public policy.

 In the current period, Green Bonds, and Green Bank are considered as prominent mechanisms to finance the green projects. A Green Bond is a capital-raising tool that green banks can use and bonds like any other bonds that raise capital for green projects. A green bond is an instrument that a green bank institution can use. On the other side, Green Banks are financial institutions that generally issue bonds to expand additional capital above the government grants, deal in loans, and recapitalize their balance sheet.

Green Financing: The Need of the Time

The GDP is considered as the best indicator to analyse the state of the economy; however, it has its discontents. The calculation of the GDP, however, does not account for the aspects of environmental degradation and sustainability. The recent COVID-19 pandemic has offered an additional opportunity for the concerned stakeholders to reevaluate the financial strategies adopted till date and corres-pond to an environmentally sustainable system in the long run. According to the Swiss Re Institute, the world's economy faces an unprecedented loss of around 10% of total economic value and up to 18% could be wiped off global GDP by 2050. Remarkably, India is ranked fifth on the Global Climate Risk Index-2021, making her one of the most climate-vulnerable countries globally. India is also the world's third largest Green House Gas emitters (UNFCCC, 2021), though, nation's per capita emission is only 40% of the global average (World Bank, 2021) and accounts for only 3.2% of cumulative emissions (Friedlingstein et al., 2021).

 In consideration of the significance of the climate crisis our Hon'ble Prime Minister in his address to the world leaders in the recently concluded Glasgow COP26 session in November 2021, committed to attaining  net zero emissions by 2070. The Prime Minister introduced the concept of "Panchamrit" as a part of the five-pronged commitments and drafted a towering ambition for India to derive 500 GW of energy from non-fossil sources by 2030, to reduce carbon intensity to 45%, and to lower projected carbon emissions by 1 billion tonnes between the year 2021 and 2030. Against this back-ground, developing a climate risk management system would enable investors and financiers to make an informed capital allocation decision for the sectors that have the potential to mitigate climate change risks.

 At the global level, the Paris Agreement has formerly emphasized scaling up action and efforts in fighting against climate crisis that includes "finance, capacity building and technology transfer, to enhance adaptive capacity, strengthen resilience and reduce vulnerability to climate change in line with the best available science, taking into account the priorities and needs of developing country parties". In the Glasgow COP26 summit, an open call has been made to build a sustainable and resilient future, and for that, every nation must begin reorganizing the association between the real economy and the financial services. The concept of Green Finance is essential to facilitate such a shift towards sustainable economic growth.

Green Bonds as one of the Green Finance instruments is a major aspect of the Green Finance. The global market had reached a total of USD 521 billion since the issue of the first green bonds in 2007 to finance climate change resolutions. Moreover, nearly 200 countries committed to mobilizing green finance under the 2015 Paris Agreement on climate change terms. The traded value of the green bond market worldwide is estimated at USD 2.36 trillion by 2023. The World Bank issued approximately USD 17 billion equivalent in Green Bonds through over 200 bonds in 24 currencies.

Green Financing: Perspectives on the Indian Economy and Initiatives Taken

India is at a critical phase in scaling sustainable environmental projects to achieve the 2030 targets. Financing is the principal barrier to the rapid expansion of India's sustainable ventures needed to support the ambitious and broader goals of the Paris Climate Agreement. The Council on Energy, Environment and Water (CEEW) projected that the achievements of the climate-friendly commitments will require investments upwards of USD 10 trillion to commit to net-zero by 2070. The investments aim to assist in decarbonizing the industrial, power, and transport sectors of India. Therefore, financing must be generous and affordable so that low-cost capital allows the Indian economy to transition to a sustainable, greener economy while facilitating steady economic growth. India has initiated its journey for carbon neutrality and put forward a whitepaper in November 2021 'Green New Deal for a Net Zero India' to be achieved by 2070. The 'Green New Deal' has classified green finance as an enabler to accelerate decarbonization. It emphasizes the need for an increased flow of capital from the national government and private entities to establish green infrastructure.

Since 2015 Indian economy has made an early mark in utilizing and implementing the policies of green finance as listed below: z

·         India entered the green bond market in 2015, with USD 1.1 billion of green bonds issued from a small set of pioneer issuers such as Yes Bank, Export-Import Bank of India, CLP Wind Farms, and IDBI and as of February 2020, the outstanding amount of green bonds in India stands at USD 16.3 billion . 

·         Since 2015 around 76% of the green bonds issued in India have been denominated in USD. Further, the World Bank has issued green bonds for several projects in India. 

·         The Reserve Bank of India (RBI) in 2015 incorporated lending to social infrastructure and small renewable energy projects within the targets.

·         RBI included the small renewable energy sector under its Priority Sector Lending (PSL) scheme in 2015. RBI has supported lending for renewable projects by entities up to Rs. 15 crores and up to Rs. 10 lakhs for private individuals. 

·         In January 2016, SEBI designed the framework for issuing green bonds and the corresponding listing requirements for such bonds. 

·         The government-backed Indian Renewable Energy Development Agency (IREDA), responsible for clean energy investments, declared to become India's first Green Bank in May 2016.

·         Since January 2018, India has issued green bonds of approximately USD 8 billion, which constituted about 0.7 percent of all the bonds issued in the Indian financial market. 

·         State Bank of India (SBI) in 2018 issued USD 650 million Climate Bonds Certified and will be used to finance wind and solar energy projects across India, and SBI's Green Bond Framework includes a commitment to help the Indian government's clean energy target of 173GW by 2022.

·         In India, several organizations such as Rural Electrification Corporation Limited (2017), Power Finance Corporation Ltd. (2017), Indian Railway Finance Corporation Ltd. (2017), Adani Renewable Energy Ltd. (2019) have issued green bonds with a maturity of 10 or more years while ReNew Power Pvt. Ltd. has issued green bonds with maturity period of lesser than five years in 2019.

·         RBI, in 2021, entered as a member of the Network for Greening the Financial System ('NGFS'), a cluster of nationalized banks that support the transition to a green economy through practices that promote the progress of the environment climate-related risks in the financial sector. 

·         SEBI leaped ahead and placed forward the 'Business Responsibility and Sustainability Report' (BRSR) in 2021 to improve environmental, Social, and Governance (ESG) standards disclosure. BRSR is obligatory from the financial year 2022-23 and is meant to apply to the top one thousand enterprises. The BRSR framework employs international ESG standards such as the Global Reporting Initiative (GRI) and presents both qualitative and quantitative data.

·         The Government of India's apex policy-making body NITI Aayog and World Resources Institute (WRI), India, with the support of GIZ India, is working towards decarbonizing transport, with a significant focus on adopting green financing that facilitates low-interest financing of electric vehicles. It has organised a consultation work-shop in February 2022.

Green Financing: The Road-blocks

According to the Economic Survey 2019-2020, India is the second-largest market globally for green bonds, with USD 10.3 billion worth of transactions in the first half of 2019. However, in India, Green finance is still in the developing stage, where green bonds comprised 0.7% of all the bonds issued since 2018 , while bank lending to nonconventional energy is about 7.9% of outstanding bank credit to the power sector as of March 2020. The major challenges pertaining to the issue of green finance are: 

·         The cost of issuing green bonds in India since 2015 has remained higher than the corporate and government bonds with similar tenure. The average coupon rate for green bonds with maturities between 5 to 10 years has remained higher than government and corporate bonds for a similar tenure.

·         Green finance lacks a universal definition and suffers from information asymmetry that often results in "green-washing", wherein the investors receive inaccurate indications about the green bonds.

·         There is a severe mismatch in the maturity period of the green projects and their financing, which often leads to increased borrowing costs and the currency risks for foreign investors. 

·         There is an elevated risk due to the absence of details within the domestic banking sector about innovative climate-friendly technologies.

Green Financing: The Way Forward

Based on the concerning issues, following suggestions can be viewed as a way forward:

·         Proposing flexible and affordable lending products that correspond to green projects' terms and payback period, thereby reducing the cost.

·         Extensive research on the market growth and demand generation for the greener infrastructure to identify the core issues in developing green economy.

·         India should focus on establishing Green Banks that adhere to the mandate of green investment, specialized green underwriting expertise, and public sources of capital. The Green Bank facilitates lower lending rates and offers flexible terms to correspond to green projects' terms and payback period.


The Indian economy is looking forward to a huge leap as it advances towards a USD 10 trillion economy by 2030 from the present USD 2.75 trillion economy - an increase of 263% in less than 8 years. Such an exponential expansion is an arduous task in itself. The ambitious climate change commitments by India (such as lowering projected carbon emissions by 1 billion tonnes in the next decade) have made this kind of expansion even more challenging. Green Financing with instruments such as the Green Banks and Green Bonds could prove to be the silver bullet provided there are proactive regulatory reforms in green financing terms and conditions. A massive discourse needs to be initiated at the national and international fora to make Green Financing a national priority. These financial tools would accelerate India's climate resilience projects while realising the five-pronged commitment (Panchamrit) of Hon'ble Prime Minister of India and thus achieving the environmental goals for the investors, for the government and for us-the citizens of the Earth!

(Amitabh Kant, CEO NITI Aayog, Piyush Prakash, Sr. Associate, NITI Aayog & Madhuri Pal, Associate, NITI Aayog) Views expressed are personal