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In the past few years, the term ‘green finance’ has gained a lot of attention across the world. The idea gets its first mention in the UN document at the UN Conference on Sustainable Development (also known as Rio+20), 2012. Though it lacks an universal definition, green finance mostly refers to financial investments in projects and initiatives that encourage more sustainable economy.
There is no universal definition of green finance, though, it mostly refers to financial investments flowing towards sustainable development projects and initiatives that encourage the development of a more sustainable economy5.
By now, several working definitions have come up—China’s Green Credit Guidelines; the Climate Bonds Taxonomy of Green Bonds; the International Development Finance Club’s (IDFC) approach to reporting on green investment; the World Bank/International Finance Corporation’s (IFC) Sustainability Framework; and the UK Green Investment Bank Policies.
Current definitions in use reveals sizeable variance—clean energy; energy efficiency; green buildings; sustainable transport; water and waste management; greening the banking system, the bond market and institutional investment; as well as areas of controversy such as nuclear and large-scale hydro energy, bio-fuels and efficiency gains in conventional power.
The World Bank Group has set up an informal Sustainable Banking Network of banking regulators, led by developing countries, to promote sustainable lending practices. In 2015, green bonds issued by governments, banks, corporates and individual projects amounted to US$42 billion.
At the global level, more than 20 stock exchanges have issued guidelines on environmental disclosure, and many green indices and green ETFs (exchange-traded funds) have been developed. A growing number of institutions, including the Bank of England and Bank of China (Industrial and Commercial Bank of China), have begun to assess the financial impact of climate and environmental policy changes. Germany, the US and the UK have developed interest subsidy and guarantee programmes for green financing, and over a dozen government-backed green investment banks are operating globally. The G-20 has also recently set up a GFSG (green finance study group).
The issue of mobilising private finance for transforming into a green global economy appeared at different global fora including the G20. Experts believe that for developing countries like India, private finance will not readily be forthcoming and public finance (both international and domestic) needs to be used to leverage private finance.
India and Green Development: Green finance is yet to pick up in India. Attaining the ambitious solar energy target, development of solar cities, setting up wind power projects, developing smart cities, providing infrastructure which is considered as a green activity and the sanitation drive under the ‘Clean India’ or ‘Swach Bharath Abhiyan’ are all activities needing
green finance.
India created a corpus called the NCEF (National Clean Energy Fund) in 2010-11 out of the cess on coal produced/imported (‘polluter pays’ principle) for the purpose of financing and promoting clean energy initiatives and funding research in the area of clean energy. Some of the projects financed by this fund include innovative schemes like—
(i) a green energy corridor for boosting the transmission sector;
(ii) Jawaharlal Nehru National Solar Mission’s (JNNSM) installation of solar photovoltaic (SPV) lights and small capacity lights, installation of SPV water pumping systems, SPV power plants, grid-connected rooftop SPV power plants; and
(iii) pilot project to assess wind power potential.
Six banks by February 2017 had issued green bonds in India. Proceeds from these bonds are mostly used for funding renewable energy projects such as solar, wind and biomass projects and other infrastructure sectors, with infrastructure and energy efficiency being considered as green in their entirety. By early 2016, the SEBI (Securities and Exchange Board of India) approved the guidelines for green bonds. India needs to take care of certain issues6 involved with the mobilisation of green finance:
(i) For a developing country like India, poverty alleviation and development are of vital importance and resources should not be diverted from meeting these development needs. Green finance should not be limited only to investment in renewable energy, as, for a country like India, coal based power accounts for around 60 per cent of installed capacity. Emphasis should be on greening coal technology. In fact, green finance for development and transfer of green technology is important as most green technologies in developed countries are in the private domain and are subject to intellectual property rights (IPRs), making them cost prohibitive.
(ii) Green bonds are perceived as new and attach higher risk and their tenure is also shorter. There is a need to reduce risks to make them investment grade.
(iii) There is also a need for an internationally agreed upon definition of
green financing as its absence could lead to over-accounting.
(iv) While environmental risk assessment is important, banks should not overestimate risks while providing green finance.
(v) Green finance should also consider unsustainable patterns of consumption as a parameter in deciding finance, particularly conspicuous consumption and unsustainable lifestyles in developed countries.