Green Finance and Sustainability: The Next Era in Financial Regulation

India’s robust economic growth attracts global financial institutions and regulatory measures to promote sustainable green finance, environmental compliance.

India’s rapid economic growth has made it an attractive destination for green finance initiatives by global development financial institutions (DFIs), Reserve Bank of India (RBI), and other financial institutions and banks. The availability of global funds through equity and debt on a long-term basis and at affordable rates is contingent upon their deployment in projects that comply with environmental, social, and governance (ESG) standards and promote sustainability.

The RBI has taken significant steps towards promoting sustainable finance by auctioning green bonds worth Rs 8,000 crore in 2023. The proceeds from these bonds will be used for green and sustainable projects such as solar and hydro power, which reduce carbon emissions. While this is a new path that comes with its own set of challenges, there are risks and mitigants in place to ensure a smooth transition towards sustainability. As more and more corporations in India become ESG compliant and use green finance for sustainable projects, they can also reap the intangible benefits of good governance, reputation, and goodwill.

Frequently, people inquire about the existence and implementation of sustainable projects, questioning whether the hype around it is justified. Moreover, there is a need to understand who assesses and evaluates such projects, as well as the criteria used to gauge their sustainability in the long run. The potential for greenwashing, which entails channelling green finance towards ESG compliance without sustainable results, also looms large. Thus, it is imperative to determine the veracity of sustainable projects and ensure that they align with their stated objectives.

It is ground-breaking to see regulators continually issuing directives on green finance, coupled with the establishment of robust monitoring frameworks.

SEBI’s directive to apply the Business Responsibility and Sustainability Report (BRSR) to the 1,000 largest listed companies (by market capitalisation) for the fiscal year 2022-23, RBI’s discussion paper on Climate Risk and Sustainability Finance Push, and the Ministry of Corporate Affairs’ ESG initiative all serve as clear indicators that the concept of sustainable finance is here to stay. Additionally, the non-convertible securities regulations issued by SEBI on February 3, 2023, which define “green debt security” as a means of raising funds for projects and assets such as renewable and sustainable energy, clean transportation, sustainable water management, climate change adaptation, and green buildings, is further evidence of the growing demand for green finance.

It is crucial to implement measures to prevent any potential misuse of green finance. Checks and balances need to be put in place at an early stage to ensure compliance and prevent deceitful practices by unscrupulous entities. The Taxonomy Regulation provides a classification system that helps businesses determine if a particular economic activity is environmentally sustainable. Market regulators must continuously review and introduce appropriate policies, ensuring that the entire supply chain is monitored to promote environmental sustainability and governance beyond just the larger players. These regulations are necessary to ensure that environmental sustainability and governance requirements are strictly adhered to.

India, being one of the fastest-growing economies, is becoming a preferred destination for large-scale economic activities, including manufacturing. However, the country also has the third-highest carbon emission levels in the world. Therefore, it is imperative to have the right policies in place to control carbon levels and establish an ecosystem that provides green finance to all relevant sectors, not only limited to solar.

On March 8, 2023, the RBI Governor, Shaktikanta Das, announced that the central bank will soon release guidelines for regulated entities to increase green lending, accept green deposits, and mitigate risks related to climate change. These guidelines, marking RBI’s first step towards implementing ESG norms, will ensure that green loans are issued solely to finance environmentally sustainable projects, which will help India achieve its goal of net-zero carbon emissions by 2070. Thus, it is evident that green finance is a sustainable financing approach that is here to stay.