Green Finance

Climate change maybe a matter of debate for politicians around the world, but investors have become increasingly aware and decisive with their investments. The financial ecosystem consisting of employees, clients, shareholders are striving for purpose and sustainability. Environmental, Social, and Governance standards are being given more importance than before in the financial decisions made by investors. These are backed by increasing awareness of climate emergency and sustainable development goals. The importance of Green Finance was briefly explained by the CEO of Morgan Stanley where he said, “If we don’t have a planet, we’re not going to have a very good financial system.” So, incorporating green practices in business operations holds utmost importance today.

But what is Green Finance?

As the demand is growing, new financial instruments, such as green loans, green bonds, green mortgage, etc., are being established along with the need for financial institutions called Green Banks. Together, these constitute Green Finance. Green Finance refers to innovative financial instruments and investment mechanisms that deliver both investable returns and environmentally positive outcomes.

As per a report by the Asian Development Bank, Asia needs to invest $1.7 tn annually between FY16 till FY30 to maintain its growth momentum and to respond to climate change.

Environmental Performance Index (EPI) 2020

The Environmental Performance Index FY20 gives a summary of the state of sustainability of the nations. EPI ranks 180 countries based on environmental health and ecosystem vitality and indicates which countries are successfully addressing environmental challenges. India stood at 168th position, though better than last year but not very impressive. There is a greater need for attention to the sustainability requirements, with more priority on issues such as air, water quality, etc.

The Need for Green Finance

The amount of CO2 emissions in the atmosphere has increased significantly since the start of the Industrial Revolution in 1750. The graph shows the cumulative carbon emissions by the top economies of the world. USA is the leader in the cumulative carbon emissions followed by China. According to a study, 9 mn die every year from toxic exposure to the environment. India’s aspiration to become a $5 tn economy by FY24 is contingent on the steady growth of its Gross Domestic Product (GDP).

Despite so much technological advancement, we have still not been able to harness renewable energy to a large extent. As per a report by the Ministry of Power, thermal energy (non-renewable) contributes 62.2% to energy production whereas renewable energy forms a meager share of the pie chart. India has missed the renewable energy addition target in FY20 for the 4th time. Only 2 renewable energy technologies: small hydro and waste to energy have exceeded their respective capacity addition. In this regard, Green Financing can help direct more capital towards projects that aim to benefit the environment.

Green Banks

Green banks can invest directly or co-invest with private players into low carbon, climate-resilient infrastructure. They can give loans at cheaper rates and can strengthen the administration of green bonds, green loans, etc.

  • Bank of America aims to mobilize $300 billion by 2030 through its Environmental Business Initiative, bringing the total commitment to more than $445 billion.
  • Barclays aims to reduce carbon dioxide intensity in its power portfolio and its energy portfolio.
  • Deutsche Bank aims to double its green financing to €200 billion by 2025. The bank will also stop financing coal investments and reduce existing exposure.
  • JP Morgan aims to facilitate $200 bn in 2020 for transactions that support climate action and sustainable development goals.
    As capital markets in India are still evolving, there is a chance to leapfrog the development paradigm by pioneering and expanding green solutions for both investments and capital through equity and debt.

    As capital markets in India are still evolving, there is a chance to leapfrog the development paradigm by pioneering and expanding green solutions for both investments and capital through equity and debt.

Green Products

Green bonds

Green bonds are the fixed income instruments that cater to projects that are environment friendly requiring long-term finances. Long-term investors now prefer bonds that invest in green assets as they understand the catastrophic impacts of climate change on their investments.

The increase in the green bond issuance market reflects the increasing awareness about green financing products. The market in China has seen a tremendous increase with India following. It shows that investors are giving more importance to the sustainable development and low carbon economy. However, there are still some challenges that need to be addressed to expand this market such as, lack of awareness regarding issuing and investing in green products, transparency, etc.

The green bond market had a good start in January and February with a combined volume of 36.9 bn, which was better as compared to last year. However, March had total issuances of only 9.7 bn, reflecting a slowdown in the whole bond market and a focus on short-term liquidity, due to the impact of COVID-19.

Green Loans

Green Loans are the financial products that aim to advance environmental sustainability. It can be used for a variety of reasons but it should be subjected to environmental criteria. For example, green loans can be used for home remodeling, installing solar panels at the roof, buying electric cars, etc.

The Government of India (GoI) came up with a stimulus towards electric vehicles under its Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme. The GoI introduced Phase 1 of FAME in 2015 and Phase 2 in 2019. However, electric mobility in India is still at an infant stage. The high up-front cost of buying an electric car is the impediment and the key to resolve the deadlock remains in solving the financial puzzle by providing products that incentivize the purchase of electric vehicles. For example, the State Bank of India introduced the first ‘Green Car Loan’ to encourage people to buy electric vehicles. It offers an interest rate that is 20 basis points lower than on the existing car loan schemes and the repayment period is 8 years.

Future Outlook

The current pandemic is a brutal reminder suggesting the need to strengthen the resilience of the nations as a whole. As the pandemic shapes the financial system, investments in climate-friendly strategies can help in boosting the growth of the nations. The post-pandemic reconstruction phase should be centered on the green economy that will enable economic growth and investment while increasing environmental quality. However, collective participation of institutions, policymakers, and corporates is going to be vital in pushing frontiers of green financing further, unleashing new opportunities in addressing climate change. It seems that the time has come for the Government to encourage the development of greener economies while simultaneously pushing environmentally-positive economic recovery.

Contributor: Team Leveraged Growth
Co- Contributor: Mohnish Gujral & Bhavika Dudia

Research Desk | Leveraged Growth