Exploring the landscape of Sustainable Financing in India in 2024
- NVS Pawan
- Dec 1, 2024
- 6 min read
Updated: Apr 9
Introduction
India has shown tremendous resilience in its financial eco-system during the ongoing global economic slowdown and geo-political uncertainty. It remains one of the fastest growing large economies in the world with a robust financial system in place. However, it is also one of the countries which is most vulnerable to the long-term effects of climate change. India has set ambitious targets to be achieved by 2030 (Panchamrit) to address looming environmental challenges while maintaining a steadfast focus on economic growth.
Sustainable financing can be viewed as a part of the financial system which is imperative for India to meet its sustainability goals. Sustainable financing is the broad spectrum of financial activities aimed at generating economic returns while promoting environmental and social sustainability. This article provides a broad overview of the sustainable financing landscape in India. It discusses all the financing instruments and other market forces which are acting in tandem to help India realize its sustainability commitments.
Sovereign Green Bonds (SGrBs)
One of the largest pillars of the sustainable financing landscape in India, these are debt instruments with fixed interest rate issued by the Government of India, through the Reserve Bank of India. The proceeds from the SGrBs are used to deploy funds in government initiatives which help in reducing the carbon intensity of the economy. The project proposals are screened and approved by the Green Finance Working Committee. The criteria for selection of projects used is ICMA Green Bond Principles. SGrBs are “Use of Proceeds” type of bonds. This means the funds are raised exclusively for the identified “green projects”. In Nov 2023, Green Bonds were included as “specified securities” for inclusion in the FAR (Freely Accessible Route). This enabled NRIs and FPIs to invest in these Bonds. The government has been issuing SGrBs since 2022–23 and ₹36,000 crores has been raised in the last two years. The next issue of ₹5,000 crores is expected in November 2024.
SGrBs are issued by the Government of India at a coupon rate which is less than that of a regular GOI bond. This difference in coupon rate is called Greenium.
Green Debt Securities (Green Bonds)
One of the most popular instruments used by Corporates and Municipal Corporations, these are debt instruments with fixed interest rates. The proceeds from Green Debt Securities are used to finance/re-finance projects and assets with specified sustainability objectives falling under the categories specified by SEBI in Regulation 2(q) of Issue and Listing of Non-Convertible Securities. The issuer of Green Debt Securities must follow strict issuance and annual disclosure requirements as per SEBI’s NCS Operational Circular. Green Debt Securities can be categorised as “Use of Proceeds” type of bonds. This means the funds are raised exclusively for the identified “green projects”. The outstanding Green Debt Issuances as on 30th April 2024 stood at ₹6,124 Crores.
The issuers for Green Debt Securities need to disclose of major elements of Business Responsibility and Sustainability Reporting (BRSR) as a part of their Impact Reporting
Sustainability Linked Bonds (SLBs)
These are debt instruments to finance/re-finance sustainability objectives and targets set by the corporates. In India, SLBs have been raised by corporates which are in hard-to-abate sectors and energy intensive industries and REITs. Unlike the earlier discussed bonds, Sustainability Linked Bonds are not “use of proceeds” type of bonds. They are identical to any other corporate bond with the only exception that they are debt instruments with variable interest rates depending upon pre-determined Sustainability Performance Targets. If the KPIs are not met, the interest rate is stepped up. These bonds operate on the SLB principles issued by the ICMA. Almost all Indian companies’ SLBs have been issued in overseas markets and in US dollars. In 2024–25, one of the prominent Indian REIT raised ₹650 Crores of SLBs to integrate sustainability in its business model.
Thematic ESG MFs
These Thematic Mutual fund schemes offer investors who are sensitive to the ESG impact of their investments, a unique approach to support the causes they believe in. They invest in Equity and Equity related instruments of Listed companies reporting under the BRSR Comprehensive framework based on the specified 6 Investment strategies. These can be issued by any Mutual Fund listed with the SEBI. They have generated significant interest amongst investors since their launch in July 2023. Thematic ESG MFs had an AUM of more than ₹11,500 Crores in September 2024.
The Mutual Funds need to have 65% of its AUM in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.
For an overview of the BRSR Framework, watch this video from the author:
Green Deposits
These are an interest-bearing fixed deposit, the proceeds of which are earmarked for being allocated towards activities/projects contributing to climate-related or environmental objectives. All Regulated Entities under RBI i.e. Scheduled Banks, NBFCs etc. offer this facility to their customers. The RE use ICMA Green Bond Principles as criteria for selection of projects for allocation of funds. The Regulated Entities REs need to put in place a Board-approved Financing Framework for effective allocation of green deposits and make disclosures of portfolio-level information on the use of funds raised from green deposits.
While the above financial instruments are essentially fund-raising mechanisms for funding or supporting sustainability related projects, there are also other significant market forces which are operating simultaneously in the Indian Sustainable Financing landscape.
Green Financing (Green Loans)
It refers to financial products like loans and credit that are used for funding environmentally friendly or sustainable development-oriented initiatives. These are targeted to individual customers and SMEs for adopting green initiatives in their homes and businesses. The most prevalent green financing products are Rooftop Solar Loans, Electric Vehicle loans and Loans to SMEs who actively create sustainable solutions for the market. Banks and NBFCs are major players in this market.
Government Subsidy and Performance Linked Incentives (PLI)
Indian Government subsidy schemes like FAME (Faster Adoption and Manufacturing of Electric Vehicles) and PLI Schemes for High-Efficiency Solar PV Module have been introduced to develop an eco-system for technology development and manufacturing in the space of electric mobility and renewable energy.
Under FAME scheme, demand incentive is available for consumers (buyers/end users) in the form of an upfront reduced purchase price of hybrid and electric vehicles (Buses, Cars, 2 Wheelers and 3 wheelers) to enable wider adoption, which is reimbursed to the manufacturer by Government of India.
The PLI scheme provides financial incentives to Solar PV Module manufacturers based on their incremental sales from products manufactured in domestic units.
ESG in Venture Capital Funding
Venture Capitalists and PE funds have started integrating ESG factors in their investment criteria for startup funding. It is now incorporated in all stages of the investment process to understand the startup’s long-term overall societal impact. Investors are excluding startups or sectors that do not meet certain ESG criteria. They are actively investing in startups with demonstrated environmental stewardship, social responsibility and robust governance practices. They are engaging with the startups in their portfolio to encourage better ESG practices.
Greenwashing is the practice of marketing products/services as green, when in fact they do not meet requirements to be defined as green activities/projects.
Indian Carbon Market (ICM)
This is envisaged as an electronic platform to be used as a carbon pricing instrument and enabling free trading of carbon credits on using a market-based mechanism approach. This trading of carbon credits will help reduce the overall cost of mitigation and achieve notified greenhouse gas emissions intensity targets. There are two kinds of carbon markets viz. Compliance markets and Voluntary Markets. Compliance markets set a cap on emissions intensity and allow entities to trade “emission allowances” to meet their targets. Voluntary markets enable entities to voluntarily offset their emissions by purchasing carbon credits from projects that reduce or remove GHG emissions. The Bureau of Energy Efficiency is the administrator of the Indian Carbon Market, which is expected to start operations in 2025.
Conclusion
The Sustainable Financing landscape looks very broad and fertile. However, it has not yet acquired the depth which is required for meeting the ambitious targets set by the government. A robust sustainability reporting in the form of BRSR is in place. There is already a bustling financial market with varied sustainability focused financing instruments.
“Change. But start slowly, because direction is more important than speed.” -Paulo Coelho.
It can be said that India has started in the right direction, now it has to accelerate its efforts to reach its nationally determined contributions by 2030.
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