On 11 April 2023, the Reserve Bank of India (RBI) put in place a new framework, effective from 1 June 2023, encouraging RBI regulated entities (RE) to offer green deposits for financing green activities and projects. It aims to “protect the interest of the depositors, aid customers to achieve their sustainability agenda, address greenwashing concerns and help augment the flow of credit to green activities/projects”.
The framework lists categories of specified green projects and green activities that encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience and improve natural ecosystems and promote biodiversity. This list further includes renewable energy, that is solar, wind and energy projects that integrate energy generation and storage; energy efficiency, such as the design and construction of energy-efficient and energy-saving systems and installations that support lighting improvements, the construction of low carbon buildings and the reduction of energy grid losses. Also included are such projects as clean transportation, for example the electrification of transport, the adoption of clean fuels and sustainable water and waste management that promotes water-efficient irrigation and flood defence systems.
The framework excludes projects that involve the extraction, production and distribution of fossil fuels, whether from new or existing sources, and those where the core energy source is fossil-fuel based. Also excluded are nuclear power generation; direct waste incineration; renewable projects that generate energy from biomass derived from feedstock in protected areas; landfill projects, and hydropower projects in which output exceeds 25 megawatts.
Defined key concepts are green deposits, being interest bearing deposits the proceeds of which are earmarked for green finance; green finance, which is the lending or investing in activities set out in the framework that contribute to climate risk mitigation and other climate related or environmental objectives, and greenwashing, namely the practice of marketing as green finance products and services that do not comply with the requirements of the framework. Green deposits can only be denominated in Indian rupees. The maturity, size, interest rate, and other terms of green deposits are subject to the RBI’s general directions on deposit acceptance.
An RE must put in place a board-approved policy on accepting green deposits and using their proceeds. The policy must be available on the website of the RE. REs must also have board-approved financing frameworks governing the allocation of the proceeds of green deposits and related matters. Such matters may be the eligibility of projects for financing, project evaluation, monitoring, reporting and third-party evaluation, and the temporary allocation of proceeds pending final use. REs must have the financing frameworks externally reviewed and post the findings of such reviews on their websites. REs must assess annually the impact of funds lent to or invested in green activities and projects through impact assessment reports that evaluate indicators prescribed in the framework. Funds channelled to green activities and projects are subject to annual independent third-party verification and assurance.
REs must present review reports within three months of the end of a financial year covering the amounts raised through green deposits during that year, lists of green activities and projects to which the proceeds of green deposits have been allocated with brief descriptions, the amounts distributed to each eligible green activity and project with the third-party verification and assurance reports and impact assessment reports. REs must disclose, in a prescribed format in their annual financial statements, portfolio-level information on how funds from green deposits have been used.
The framework appears well-thought through, with checks and balances in place to prevent the misuse and misallocation of green funds. Possible gaps, however, are a lack of detail on whether funds are to be used for new projects only and whether funds used for existing projects will be subject to a limit. These may be deliberate omissions and may be clarified by the RBI once data exist on how funds have been raised and used by way of green deposits.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal.
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