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Special Content

Issue no 48, 25 February-3 March 2023

Changing Landscape of Finance Towards Green, Sustainable Solutions


Avinash Mishra

Madhubanti Dutta


Green finance is widely described as any component of the financial industry relating to environmental issues, efforts, goals, outputs, or impacts. Environmental organisations, climate bonds, transition bonds, sustainability-related bonds, green equity funds, exchange-traded funds, and asset-backed securities are a few examples. In order to combat climate change, reaching 'Net Zero' requires green financing. India needs to invest USD 2.5 trillion in climate action (with at least USD 1 trillion expected from rich countries) to reach its 2030 goals and ensure that climate innovations and initiatives get the necessary momentum in the country, particularly beyond the largescale renewables. This requires equity and loans from private sources and state budget spending. The Government wants to support early-stage investments made through a blended capital platform to scale up climate-focused ideas in India. Such Fund will put a lot of emphasis on projects related to demand-side efficiency, electric transportation and mobility, circular economy projects, sustainable food, agricultural adaptation, and resilient infrastructure. According to estimates, India will need about INR 162.5 lakh crores (USD 2.5 trillion) between 2015 and 2030, or nearly INR 11 lakh crores (USD 170 billion), to fulfill its Nationally Determined Contributions (NDCs) under the Paris Agreement. Green growth was one of the seven primary themes that made it into the Budget this year, including green credits, green energy, green mobility, and green farming. However, India must make sure that financial aid is focused on low-carbon technologies, identify the economic sectors most affected by environmental deterioration, and take action to address these issues. One of the four possibilities for transformation during AmritKaal is green growth. Many green fuels, green energy, green farming, green mobility, green buildings, green equipment, and policies for energy efficiency across numerous economic sectors are being implemented. To achieve its 2030 goals, India needs to invest USD 2.5 trillion in climate action (with at least USD 1 trillion anticipated from rich nations) . In addition to public budget spending, this is necessary to ensure that climate ideas and initiatives get the required action in the country, particularly outside the large-scale renewables. The Government wants to support the scaling up of climatefocused innovations in India through early-stage investments made through a blended-capital platform. The Fund will predominantly invest in demandside efficiency efforts, electric transportation/mobility ventures, circular economy enterprises, sustainable food, farming adaptation measures, and resilient infrastructure. Through the Paris Agreement, the 2030 Agenda for Sustainable Development, and numerous other multilateral initiatives, the world has demonstrated its clear commitment to building a better future for people and the planet. The world is progressing in addressing environmental issues, including air pollution, unsustainable resource use, and climate change that harm economies and human health. But we need to put the might of the world financial system behind our goals and discover better, more environment friendly economic practices to alter our societies effectively. The growing momentum for green financing is encouraging in this regard. The present task is to take the foundation that has been established and transform it into actual and meaningful flows of private and public capital to ventures that serve our sustainable development goals and provide investors with safe long-term rewards. The G20, the G7, many countries, and a large portion of the corporate sector have started the process. A 2022 IMF report indicated that governments throughout the world spent US$5.9 trillion (or 6.8% of GDP) on such subsidies in 2020, and even a 2021 OECD study expected a rise in such contributions, despite the G20's 2009 commitment to phase out inefficient and wasteful fossil fuel subsidies. Priorities in public policy are swiftly changing to incorporate green financing. Despite improvements in public awareness and financing options, research suggests that a reduction in asymmetric information through improved information management systems and increased coordination among stakeholders could pave the way for greener and more sustainable long-term economic growth in India. To provide the capital necessary for these kinds of activities, new financial entities are being created, including green banks and green funds, as well as new financial products like green bonds, carbon market instruments (such as a carbon tax), and green bonds. Together, they make up green finance. In the broader context of ecologically sustainable development, green finance can be defined as financing initiatives that generate environmental advantages. We will need billions of dollars for green finance in the next ten years. The greening of the banking system, the bond market, institutional investors, risk analysis, and progress measurement may be some essential research fields. Environmentally sustainable growth on a global scale must require green financing. Climate-resilient societies can be accelerated by investments in low-carbon technologies, ecosystem-based strategies, and robust and sustainable infrastructure. To address climate change and provide a sustainable future for the present and future generations, a massive global transformation of infrastructure, ecosystem resilience, the food system, and industrial expansion is necessary. The continued flow of public and private capital into unsustainable businesses worsens the funding crisis for tackling climate change and protecting the environment. Public finance contributes to climate change through stateowned enterprises, financial institutions, and public spending. The entire financial system is affected by the extensive effects of climate change, which are not exclusive to a single industry or region. This impact will be devastating if left unchecked. Every nation's transition to a sustainable economy depends heavily on the financial system, particularly when it comes to raising private capital to close the gap between supply and demand for green activities. Sustainable economic growth is essential to the conversation as a whole. Rapid economic growth frequently comes at the expense of the environment. Natural resource depletion, environmental degradation, and excessive pollution are all harmful to public health and hinder the development of a sustainable economy. Nations worldwide have been putting more emphasis on employing eco-friendly technologies to safeguard and significantly improve the environment.


Role of Banks in Tackling Climate Change: The banking industry has supported India's commercial activity throughout the country's development as a significant economic force. Even if various other channels, such as the bond and equities markets, have expanded alongside it, it is still an essential source of finance for industries. Therefore, it must be considered a critical factor in reducing the effects of climate change. Financial institutions must continue to invest in financing the nation's green infrastructure to support the transition to net-zero emissions. Despite not playing a significant direct part in climate change, banks still play a crucial supporting function through financing various industries. Today, technology is evolving quickly and is essential to many industries' net-zero shift. For a quicker transition to net-zero, some areas require a significant financial boost of up to $ 2 trillion, such as electrifying transportation, creating energyefficient buildings, lowering GHG emissions from the industrial and agricultural sectors, redesigning the power grid to supply clean electricity, expanding carbon capture, use, and storage, and implementing hydrogen fuel cells. There is a boom in green finance. By 2023, the market for green bonds could be worth $2.36 trillion globally. Green finance can be defined as any structured financial activity-a product or servicedesigned to produce better environmental results. To promote the development of green projects, lessen the climate impact of more conventional projects, or a combination of the two, it includes a variety of loans, debt arrangements, and investments. According to a report titled 'Landscape of Green Finance in India 2022', published by the Climate Policy Initiative, India's green financing needs revision according to the country's current needs. The data shows that inflows of funds in green projects were $44 billion (Rs 309,000 crore) in 2019-2020, representing about 1/4th of the total green finance needs. According to the Paris Agreement, India needs around $2.5 trillion in green financing between 2015 and 2030 to achieve Nationally Determined Contributions (NDCs) under the deal, roughly $170 billion per year. India needs approximately Rs 162.5 lakh crore ($2.5 trillion) till 2030 for NDCs and Rs 716 lakh crore ($10.1 trillion) to achieve Net-Zero emissions by 2070. By conservative estimates, the current tracked green finance in India represents approximately 25 percent of the total requirement across sectors to meet the NDCs, the report noted. In 2021, India announced its enhanced climate action Panchamrit targets, which include adding 500 GW of nonfossil fuel-based energy capacity and meeting 50 percent of its energy requirements through non-renewable sources. Infusing New Life into Green Development, India is addressing the issue of climate change with various initiatives to usher in a movement for sustainable living. Alongside the government, individuals, corporations, and organizations too must participate in this action to mitigate the climate hazards today. Earlier on 9 November 2022, the government approved India's First Sovereign Green Bonds Framework to strengthen the country's commitment towards its Nationally Determined Contribution (NDCs) targets and help attract global and domestic investments in eligible green projects. Green Bonds are a financial arrangement that generates proceeds for investment in environmentally sustainable and climate-suitable projects. Ecologically sustainable projects include producing energy from renewable sources like solar, wind, biogas, green building, recycling, efficient disposal, conversion to power, etc.


Landscape of Green Finance in India-Way Forward: The economy needs to attract the necessary pools of capital, which means that institutions like the Green Climate Fund must finance innovations and reduce risks. India's cleantech startups will be essential to this environmental endeavor. The Indian Government has shown a strong desire to expand the startup and cleantech ecosystem in the nation. A number of programs have been introduced to support the same Startup India, Atal Innovation Mission, and Atmanirbhar Bharat. To achieve the objectives outlined above, several startups and early-stage ventures have sprung up that focus on various mitigation and adaptation aspects. These companies would require early-stage growth finance to progress beyond the earliest stages and contribute significantly to the country's fight against climate change. The government aims to promote green growth initiatives that lower the economy's carbon intensity and create numerous opportunities for green employment. The government is implementing multiple programs for green fuel, green energy, green farming, green mobility, green buildings, and green equipment, as well as rules for energy efficiency in various economic sectors. India is moving in the direction of the Panchamrit and netzero carbon emissions by 2070 to pave the way for a green industrial and economic revolution. This aims to inspire an environmental movement by highlighting the mission of "LiFE," or Lifestyle for Environment. Our emphasis on "Green Growth," which will direct us through the AmritKaal, is expanded in the 2023 budget . The government suggested a Green Credit Program, to be notified under the Environment (Protection) Act, to promote behavioral change by rewarding activities taken by businesses, people, and local environmentally responsible and responsive local organisations. Climate financing has emerged as one of the most promising prospects for 2030. To increase creative finance, new mechanisms must be put in place at the international, regional, and national levels. India must establish a platform to boost climate finance to address climate change while advancing the SDGs for poverty, gender equality, and peace. Globally speaking, the Middle East and North Africa are already the most food and water-insecure region, and their temperature rise is outpacing that of the rest of the world. The SDGs will be undermined unless green funding reaches the most disadvantaged, leaving hundreds of millions of people behind. In collaboration with banks, insurers, and investors, there will be a greater emphasis on applying the methodology to evaluate opportunities, cutting-edge tools like future thinking and scenario-based planning to test novel solutions, and strategic positioning for new investment opportunities like impact-based financing for combating climate change and localising SDGs. So the need of the hour for a developing nation like India is to develop a resilient route to close the financing gap and establish innovative, integrated solutions for sustainable development. In addition to protecting the environment, accelerating the SDG achievements will help develop national resilience and give communities more authority, ensuring that no one is left behind on the path to 2030.


(Shri Avinash Mishra is Advisor, Natural Resources, Environment & Climate Change Division, and Ms Madhubanti Dutta Young Professional, NITI Aayog, Government of India. She can be reached at dutta.madhubanti@gov.in.)

 Views expressed are personal