Key Takeaways
• Green finance presents promising opportunities in India and has received support from the government, regulatory authorities such as SEBI, and the private sector.
• ESG investments, green deposits and GSS+ bonds are some modes through which the green transition is being driven in the financial sector.
• In order to measure and manage portfolio impact, it is imperative to assess financed emissions. Our team of experts at CERE can facilitate this process and assist in identifying strategies for greening the portfolio.
Climate change is being recognised as a systemic risk impacting all sectors of the global economy. As per recent estimates by the Reserve Bank of India (RBI), up to 4.5% of India’s GDP could be at risk by 2030 owing to lost labour hours from extreme heat and humidity. RBI further emphasises the need for an accelerated reduction in the energy intensity of GDP to achieve India’s net zero goal by 2070. A successful green transition would require large investments towards environmentally and socially beneficial projects. Recognising this as a climate opportunity, the green finance segment of the financial sector has received a significant impetus in the country in the past few years.
Promoting Green Finance
As per the Climate Bonds Initiative, India is the sixth largest issuer of green, social, sustainable, sustainability-linked and transition bonds (GSS+) in the Asia Pacific region. World Bank estimates reveal that Indian green bond issuances have reached a total of $21 billion as of February 2023, with the private sector responsible for 84% of the total. The government has also sought to enter the green bond market with a sovereign green bond framework formulated in 2022. On 25 January 2023, the Indian government issued its first sovereign green bond for a total of INR 80 billion followed by another INR 80 billion being issued on 9 February. This is a move to mobilise resources for public sector projects that reduce the country’s carbon intensity.
Given the current emphasis on sustainable business models, numerous studies have been undertaken to assess the impact of ESG performance for a firm. Researchers have found that ESG scores have a positive and significant relationship with firm profitability. This trend has attracted investors who now actively promote ESG finance. Several asset-management companies in India have also launched ESG funds.
To echo the rising interest, the Nifty 100 ESG Index was specifically designed to assess the performance of companies based on ESG scores. Additionally, the Securities and Exchange Board of India (SEBI) announced measures in July this year to support ESG investing and now allows mutual funds to launch various strategy-based funds within the ESG category.
Indian banks also support green mortgages. Customers receive better borrowing rates for purchasing energy-efficient homes or implementing energy-saving measures. In fact, the International Finance Corporation estimates a residential green housing investment opportunity of $1.25 trillion in India from 2018 to 2030. Green mortgages are popular financial instruments worldwide and can be seen prominently in Europe and the USA.
In order to enable individuals and organisations to deposit their funds with banks to specifically finance sustainable projects, the RBI has recently released a framework for green deposits. Regulated entities will be able to offer this scheme with effect from 1 June 2023 and facilitate the flow of credit to projects specified by the RBI which involve renewable energy, green transport, green buildings and climate change adaption among others.
Portfolio Impact
As climate risks increase, financial institutions need to ensure that their portfolios become climate-resilient. While ESG strategies have evolved and improved over the years, there are gaps in terms of transparency and the lack of standard ESG criteria. Investors are also wary of greenwashing by companies who communicate data that misleads stakeholders. Disclosure of accurate information on relevant platforms thus becomes paramount.
The Carbon Disclosure Project (CDP), a global reporting platform, and the Taskforce on Climate-related Financial Disclosures (TCFD) encourage financial institutions to calculate and report their portfolio emissions. Also called financed emissions, these are absolute emissions that banks and investors finance through their loans and investments. Assessing portfolio emissions has also been recommended by the regulatory authorities in India.
The GHG Protocol Corporate Value Chain (Scope 3) Accounting & Reporting Standard, a global emission reporting standard followed by a majority of companies worldwide, categorizes investments as a downstream Scope 3 category. Thus, financed emissions form a part of Scope 3 emissions for a financial entity. Measuring these emissions could have the following benefits:
Green finance product offerings would certainly help reduce the negative climate impact of banks and other financial institutions. Moreover, banks worldwide have begun committing to carbon neutrality and developing targets to achieve net zero emissions by 2050 or sooner. Financial institutions are also opting to join the Science-Based Targets Initiative (SBTi) to align their investment and lending activities with the Paris Climate Agreement. So far, 4 Indian companies offering financial services have committed to SBTs.
Elevate Your Business with Our Carbon Disclosure Solutions
CERE’s Carbon Map & CapTM program is designed to help companies by providing them with the necessary guidance to identify the most strategic environmental opportunities and make the connection between environmental performance and business value.
We support financial institutions throughout their green transition and facilitate the assessment of portfolio emissions as per comprehensive standards designed by the Partnership for Carbon Accounting Financials (PCAF).
Asset classes covered by the PCAF methodology for portfolio emissions
Furthermore, we engage with relevant stakeholders and help companies chart a roadmap towards carbon neutrality. This includes developing SBTs and reporting on global platforms such as CDP. We further understand the complexities and challenges involved in data collection, and provide data capture solutions which help organisations become compliance-ready.
Connect with us at info@cere-india.org to take the next step in your journey towards sustainability.
