GREEN FINANCE: ECONOMY

GREEN FINANCE: ECONOMY

NEWS: Govt plans National Green Financing Institution to achieve climate goals: NITI Aayog

 

WHAT’S IN THE NEWS?

India is planning to establish a National Green Financing Institution to mobilize funds for climate initiatives and support its net-zero target by 2070. Challenges like lack of clear definitions, greenwashing, and maturity mismatches hinder green financing, prompting measures like sovereign green bonds and green deposits.

 

National Green Financing Institution: Supporting India’s Net-Zero Goals

1. Need for a National Green Financing Institution

  • The Indian government is planning to establish a National Green Financing Institution to support its net-zero emissions target by 2070.
  • Current climate finance flows are much lower than the required levels, hindering progress toward climate goals.
  • The institution will aggregate green capital from various sources and help lower the cost of capital for green projects.

2. Proposed Structure & Implementation

  • NITI Aayog is exploring different mechanisms to operationalize the institution, including:
  • A dedicated green bank, modeled on NaBFID or NABARD.
  • Repurposing existing institutions like IREDA (Indian Renewable Energy Development Agency).
  • Creating a Climate Fund in GIFT City to attract global green investments.
  • Developing Green Infrastructure Investment Trusts (Green InvITs).
  • Studying global best practices from established Green Banks worldwide.

 

India’s Climate Commitments & Need for Green Finance

1. Nationally Determined Contributions (NDCs) – Climate Targets

India, as part of its climate commitments under the United Nations Framework Convention on Climate Change (UNFCCC), 2022, has pledged:

  • Reduce GDP emission intensity by 45% by 2030 (compared to 2005 levels).
  • Achieve 50% of installed electric power capacity from non-fossil fuel sources by 2030.
  • Increase non-fossil power capacity to at least 500 GW by 2030 (up from 165 GW in 2024).
  • Create an additional carbon sink of 2.5–3 billion tonnes through increased forest and tree cover by 2030.
  • Achieve net-zero emissions by 2070.

2. Green Financing Requirements

  • As per preliminary estimates (Paris Agreement, 2015), India needs at least USD 2.5 trillion (at 2014-15 prices) between 2015-2030 to meet its climate commitments.
  • The financial sector must play a pivotal role in mobilizing and allocating capital for green projects.

 

Challenges in Green Financing

1. Lack of Clear Definition of Green Finance

  • India lacks a clear, uniform definition of green finance.
  • Terms like climate finance, sustainable finance, and green finance are used interchangeably, creating confusion.
  • This ambiguity makes it difficult for investors and regulators to track green investments accurately.

2. Greenwashing Risks

  • Greenwashing refers to misleading claims about environmental benefits by businesses receiving green finance.
  • Some firms divert funds from green projects to non-sustainable ones while falsely marketing them as eco-friendly.
  • This practice erodes investor confidence and reduces the effectiveness of green finance initiatives.

3. Failure to Internalize Environmental Externalities

  • Externalities are indirect effects of an economic activity on third parties:
  • Positive externalities: Benefits to society from green investments (e.g., cleaner air, lower carbon emissions).
  • Negative externalities: Harms from polluting investments (e.g., industrial pollution, deforestation).
  • Indian infrastructure investments have failed to incorporate these externalities effectively, leading to:
  • Underinvestment in green projects.
  • Overinvestment in polluting (brown) projects.

4. Maturity Mismatches in Green Financing

  • Green projects require long-term funding, but investors often seek quick returns.
  • The high capital requirement and low short-term returns discourage investments.
  • This mismatch makes securing long-term financing difficult for green initiatives.

5. Information Asymmetry & Investor Uncertainty

  • Investors lack clear data on the commercial viability of green technologies.
  • Inconsistent government policies create uncertainty around renewable energy projects.
  • This results in risk aversion among investors, slowing down green financing.

 

Government Initiatives for Green Finance

1. Sovereign Green Bonds

  • Sovereign Green Bonds are fixed interest-bearing financial instruments issued by governments or intergovernmental organizations.
  • The funds raised from these bonds are exclusively used for climate-resilient and environmentally sustainable projects.
  • In 2023, the Reserve Bank of India (RBI) issued ₹8,000 crore worth of green bonds under its Sovereign Green Bond Framework.
  • No cap on foreign investment in these bonds as they are classified as specified securities under the fully accessible route.

2. Green Deposits

  • Green deposits are fixed-term deposits meant for investors who wish to finance environment-friendly projects.
  • Earlier, Green Bonds were the primary fixed-income ESG product, but Green Deposits are now gaining traction.
  • These deposits allow corporations to integrate sustainability into their treasury operations.

 

Framework for Green Deposits (RBI Guidelines)

  • Objective:
  • Encourage banks to offer green deposits to customers.
  • Protect depositors’ interests and help them achieve sustainability goals.
  • Prevent greenwashing and increase green credit flow.
  • Applicability:
  • Applies to Scheduled Commercial Banks (excluding payment banks, RRBs).
  • Covers Deposit-taking NBFCs and Housing Finance Companies (HFCs).
  • Green Deposit Structure:
  • Issued as cumulative or non-cumulative deposits.
  • Can be renewed or withdrawn upon maturity.
  • Denominated only in Indian Rupees (INR).
  • Fund Allocation for Green Deposits:
  • Proceeds from Green Deposits must be used exclusively for:
      • Renewable Energy
      • Energy Efficiency
      • Clean Transportation
      • Climate Change Adaptation
      • Pollution Control
      • Sustainable Natural Resource and Waste Management
  • Exclusions:
      • Nuclear power projects.
      • Biomass energy projects.
      • Large hydropower plants (greater than 25 MW capacity).
  • Mandatory Third-Party Verification:
  • Funds raised must undergo annual third-party verification to ensure proper allocation.
  • Banks remain fully responsible for ensuring end-use compliance.
  • A public review report must be published, detailing:
      • Total amount raised under Green Deposits.
      • How funds were allocated to eligible projects.
      • Findings from third-party verification.

 

Conclusion: Strengthening Green Finance for a Sustainable Future

  • The National Green Financing Institution will play a key role in aggregating funds and reducing capital costs for green projects.
  • Addressing challenges like greenwashing, investor uncertainty, and funding mismatches is essential.
  • Government initiatives, including Sovereign Green Bonds and Green Deposits, provide structured financial mechanisms for scaling up green investments.
  • Clear policies, robust infrastructure, and investor confidence are crucial to accelerate India's transition to a green economy and achieve net-zero emissions by 2070.

 

Source: https://www.thehindu.com/business/Economy/govt-plans-national-green-financing-institution-to-achieve-climate-goals-niti-aayog/article69263597.ece