In 2018, the International Finance Corporation, (a private-sector arm of the World Bank), and Amundi, (a leading asset manager from France), launched the world’s largest green bond fund focused on emerging markets. The Amundi Planet Emerging Green One (EGO) fund would invest in green bonds issued by emerging markets. Examples like these would greatly help scale-up green finance in vulnerable emerging markets and increase their capacity to fund climate-smart investments.
Overall, nearly 1,500 global investors managing $45 trillion of assets have made public commitments towards responsible investment. This would expand access to green projects and achieve environment and social Return on Investment. It also signifies that institutional investors, who manage substantial corpus, are now becoming active in the green finance space, and it is to utilise the funds from these sources that Indian enterprises have scaled-up their issuance of green bonds.
A Bloomberg New Energy Finance report said India ranked second, globally, in the attractiveness for renewable sector investments. Green bond issues, especially Indian private-sector players in renewable energy, were $3 billion in 2017, almost double from 2016 levels, as per Dealogic. But while the year-on-year doubling sounds impressive, the absolute value of $3 billion is dwarfed when compared to the trillions India needs. The Environment ministry estimates India will need $280 billion over the next five years for green infrastructure alone, while Moody’s Investors Service estimates India would need $150 billion over the next five years, to meet its 2022 renewable target of 175 GW.
Green finance is essentially the funding of projects that save our natural environment from further degradation. India’s financial market regulator, the Securities and Exchange Board of India, mandates sectors like renewable energy, public transport, waste management, water conservation and biodiversity as environment-friendly. However, the policies may need to expand this further, to include the finance of projects related to agriculture and private transport and the broader industry, since these are also amongst the largest emitters of greenhouse gases. Air, water and soil are the precious resources we need to protect for our future generations, who are already showing their unhappiness at the excesses of the previous generations. The policies also need to expand coverage in terms of not only preferring projects that are environment-friendly, but rather ensure every project undertaken by the finance industry in India is compliant with environmental standards.
The UK’s Green Finance Taskforce provides and advocates the policy roadmap for promoting green finance. It has also promoted London as a green finance hub, thus making the London Stock Exchange as the most sought-after green bond market globally. The India International Exchange in GIFT-City is India’s first international exchange promoted by the Bombay Stock Exchange. It launched its green bond platform in 2019, and aims to facilitate debt capital raising in any currency by both foreign and Indian issuers ($4 billion listed so far). Policies have to ensure that the listing process is made even more issuer-friendly so that it scales-up fast. The platform also needs to broaden its role in policy advocacy, in line with the UK’s Green Finance Taskforce. Policies should also seek to develop a disclosure framework in line with the TCFD recommendations, complemented by voluntary information.
Greening of investments can often come at the expense of short-term growth, its long-term benefits aside. Ergo, emerging markets like India need to reduce the cost of green investments in order to fuel a sharper uptick from issuers. Policies need to look at reducing the cost through partial guarantees from the multilateral or public sector bodies, through a hedging mechanism, to lower the hedging cost for the issue or other mechanisms that help reduce the cost of capital. That would imply joint action by the public and private sector, rather than by the private sector players alone. Credit support could also make the smaller issuers more attractive to risk-averse institutional investors.
Some Indian asset managers are now launching green-only funds, though these mainly focus on ESG (environment, social and governance) parameters, which judge the issuer rather than the project. There are some Alternative Investment Funds looking at this space. Policies have to support local fund structures that look to fund green projects and are able to mobilise dedicated debt capital from local investors accordingly. Starting with high net worth individuals, and Family Offices, followed by pension and insurance funds, once their investment restrictions on debt capital are lifted, and further from non-resident Indians, once foreign investment portfolio policies allow it.
In the end, financial policies have to develop approaches and instruments to mainstream green finance, and this needs collective effort by all the stakeholders; government, regulator, corporations and investors. And once designed and executed, policies need to hold consistent so that the investors gain the confidence to allocate further assets to this space. Lastly, policy also needs to build awareness and acceptability of green finance, both amongst the potential issuers and investors, so that more capital flows into, and is demanded, into such assets.