No green finance framework no sustainable development

By Rajesh K Sehgal, Dentons Link Legal
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India’s growing economy faces challenges from climate change and environmental degradation. Its target, under the Paris Agreement goal, of 450GW of renewable energy (RE) capacity by 2030 needs investment of USD30-40 billion annually. Transitioning to a low-carbon economy requires substantial increases in both public and private investment.

Green financing aligns the financial sector with projects mitigating climate change and promoting RE to achieve a greener economy. The government has implemented a number of schemes emphasising renewables and smart transport. In 2019, it launched two phases of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme 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 Perform Achieve and Trade (PAT) scheme in an effort to change to a green energy economy. Companies may trade carbon credits, earned by reducing their emissions. Incentives are available to invest in RE and other emissions-reduction technologies.

Rajesh K Sehgal, Dentons Link Legal
Rajesh K Sehgal
Partner
Dentons Link Legal

To achieve carbon neutrality by 2070, India is facilitating green financing, focusing on four areas. The first is establishing a comprehensive classification system enabling the development of green projects and minimising transaction costs. Next is to create a framework for pricing carbon, ensuring that the costs of climate change mitigation and adaptation strategies are factored into mainstream investments. The third is promoting the use of national investments by establishing green infrastructure investment trusts (InvITs) that include bonds and other instruments. The final aim is to lessen barriers to green financing when dealing with global markets by minimising prevarication costs, providing guidelines for external borrowing and reducing regulatory obstacles.

Three types of incentive schemes are commonly used in RE financing, accelerated depreciation (AD), viability gap funding and generation-based incentive. AD is a tax-based incentive aimed at project developers. It plays a significant role in attracting investment, particularly for solar projects.

New mechanisms have been introduced to speed up the generation of green energy, such as priority sector lending (PSL) recognition. The Reserve Bank of India (RBI) has designated green financing and renewable energy as a priority sector. Its guidelines direct banks to allocate 40% of the higher of their net credit or an equivalent amount of off-balance sheet exposure to priority sectors such as wind and solar projects, street lighting and micro-hydel plants. Green bonds are issued by sovereign entities for sustainable development. They must achieve a suitable credit rating to ensure financial viability and are overseen by the Securities and Exchange Board of India (SEBI). Such bonds represent only 3.8% of the financial market but this exceeds the proportion in developed countries such as the US, UK and Australia.

Environmental, social and governance (ESG) scores enable investors to see a company’s overall performance and make informed decisions regarding capital allocation. The SEBI has made ESG disclosures mandatory for the top 1,000 listed companies as part of its Business Responsibility and Sustainability Reporting initiative. ESG is gaining momentum, as seen by many ESG funds entering the investment market.

Despite increasing public awareness and financing opportunities, the economy faces significant obstacles to green financing. These include high borrowing costs, limited awareness, misleading compliance claims, disclosure requirements, and mismatches between long-term green investments and short-term investor interests. Green bonds and other green financing instruments thus have no competitive advantage over conventional energy funding.

With its burgeoning population, rising energy demands and increasing environmental concerns, India’s developing economy requires green financing. To attract funding from domestic and international investors, more transparent and supportive policies are essential. Green finance alone may not provide a complete solution to environmental and social challenges, but it will be vital in encouraging companies to prioritise these issues and to foster sustainable investment practices.

Rajesh K Sehgal is a partner at Dentons Link Legal

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