India’s growing economy is facing challenges from climate change and environmental degradation. Its goal, under the Paris Agreement target of generating 450 gigawatts of renewable energy capacity by 2030, requires an investment of US$30-40 billion annually. The transition to a low-carbon economy requires significant increases in public and private investment.
Green finance aligns the financial sector with projects that mitigate climate change and encourage renewable energy to achieve a greener economy. The government has implemented a number of schemes that focus on renewable energy sources and smart transportation. In 2019, it launched two phases of the Hybrid and Electric Vehicle Manufacturing and Adoption Acceleration (FAME) plan to boost credit, reduce upfront costs, and develop infrastructure to support the production and sale of green vehicles. The government has introduced carbon trading through the Performance, Achievement and Trade (PAT) scheme in an effort to transition to a green energy economy. Companies may trade carbon credits, which are earned by reducing their emissions. Incentives exist to invest in renewable energy and other emissions-reducing technologies.
To achieve carbon neutrality by 2070, India is facilitating green finance, focusing on four areas. The first is to establish a comprehensive rating system that enables the development of green projects and reduces transaction costs. The next step is to establish a carbon pricing framework, ensuring that the costs of climate change mitigation and adaptation strategies are included in key investments. The third is to encourage the use of national investments through the creation of Green Infrastructure Investment Funds (InvITs) that include bonds and other instruments. The ultimate goal is to reduce barriers to green finance when engaging with global markets by reducing dodgy costs, providing guidelines for external borrowing and reducing regulatory hurdles.
Three types of incentive schemes are commonly used in renewable energy financing, accelerated consumption (AD), viability gap financing, and generation-based incentives. AD is a tax incentive aimed at project developers. It plays an important role in attracting investment, especially for solar energy projects.
New mechanisms have been introduced to accelerate green energy generation, such as priority sector lending (PSL) recognition. With the Reserve Bank of India (RBI). specific Green finance and renewable energy as a priority sector. Its guidelines direct banks to allocate 40 percent of their net top credit or equivalent off-balance sheet exposure to priority sectors such as wind and solar projects, street lighting and small hydro plants. Green bonds are issued by sovereign entities for sustainable development purposes. They must obtain an appropriate credit rating to ensure financial viability and be supervised by the Securities and Exchange Board of India (SEBI). These bonds represent only 3.8 percent of the financial market, but this exceeds the proportion in developed countries such as the United States, the United Kingdom and Australia.
ESG results allow investors to see a company’s overall performance and make informed decisions regarding capital allocation. SEBI has made ESG disclosures mandatory for the 1,000 largest listed companies as part of its Business Responsibility and Sustainability Reporting initiative. ESG is gaining momentum, as evidenced by the entry of several ESG funds into the investment market.
Despite increased public awareness and financing opportunities, the economy faces significant hurdles to green financing. These include high borrowing costs, limited awareness, misleading compliance claims, disclosure requirements, and a mismatch between long-term green investments and investors’ short-term interests. Thus green bonds and other green financing instruments do not have a competitive advantage over conventional energy financing.
With a growing population, growing energy demand, and growing environmental concerns, India’s growing economy needs green financing. To attract financing from local and international investors, more transparent and supportive policies are necessary. Green finance alone may not provide a complete solution to environmental and social challenges, but it will be vital in encouraging companies to prioritize these issues and promoting sustainable investment practices.
Rajesh K Sehgal is a partner at Dentons Legal link
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