Sustainable finance has always been a grey area for Indian economy till 2008. RBI in 2008 came up with one circular highlighting the need of connecting the finance to social and environmental issues. The motive of RBI’s efforts was to raise awareness in the banking fraternity to promote sustainable finance.
Sustainable finance includes green bonds, sustainable funds, impact investing, microfinance, credits for sustainable projects and development of whole financial ecosystem in a more sustainable way. Hence, the meaning of sustainable finance is making the financial services available to those activities which encompass the vision of environmental, social and governance – ESG criteria. In other words, sustainable finance means to make the financial services available for improvement of economic efficiency, prosperity and competitiveness and at the same time maintaining the ecological balance and leaving least environmental footprints.
There are different models available in sustainable finance. Few of them are Socially Responsible Investing – SRI, Green Finance, Social Finance, Social Business.
It has been observed that bankers, investors and insurers have always been promoting those investments which have been giving them better returns and increase their profits. But, now the trends are changing. Investors now seem more concerned about environmental and ethical investing. In 2015 Yes Bank had shaken the market with launch of green bonds. Thereafter, a lot of investors are coming forward to invest in green bond. Statistics shows that India is the second largest market for green bonds. In India Green Bonds for an amount of approximately US $7.2 billion has already been issued. These investments are done mostly for funding the projects associated with renewal energy. Green Bonds are very much in demand in domestic and international market. In some of the cases, these bonds were oversubscribed.
Various credit rating agencies are also considering the environmental initiatives taken by the units. In 2019 more than seven thousand ratings were published by Moody’s. Above 30% of these units were facing a lot of challenges for improving their positions in parameters related to environmental and social governance issues. Moody’s has made the issues related to ESG material while assigning the rating to these units.
Various industrial sectors are also encouraging the ESG issues. Be it an automobile industry or power industry, everywhere ESG is being focused upon. They think that if it is not considered right now, future will be dark. Automobile industry has been already showing the sign of changes. Many automobile manufacturers are bringing environmental friendly vehicles. Electronic vehicles are now being introduced. Scooters, Cars and Luxury vehicles are now being produced. After the implementation of BS – VI, petrol vehicles are preferred to diesel vehicles. Hence those vehicles are now being discouraged which are more prone to leaving more carbon footprints.
Consumers are also making their efforts to minimize the global hazards. Various reports are available on internet that substantiate this statement. One study conducted by Unilever states that 21% of the consumers surveyed across five different countries claim that consumers are interested in choosing those brands that are making their sustainability credentials clear on their packaging or in their marketing. One another study shows that 53% of shoppers in UK, 78% in USA and 88% in India feel better when they buy products that are sustainably produced.
Regulators and Governments are also taking positive initiatives to improve green financing. In 2012, SEBI introduced a requirement for the top 100 companies in terms of market capitalization to issue Business Responsibility Reporting – BRR. This BRR is supposed to include 9 principles – ethics, product lifecycle, employee wellbeing, engagement of stakeholders, policies for group/joint ventures/ suppliers/NGOs, environmental strategy, the company’s membership of any trade association, how it delivers inclusive growth and its focus on the customer. In 2017, SEBI came up with specific guidelines on Green Bonds. SEBI has provided definitions , securities and laid down disclosure requirements in its guidelines of 2017. The motive of bringing out this BRR and Green Bonds related guidelines by SEBI was to make everyone feel that we all are responsible for decreasing the level of carbon footprints .
RBI in April 2020, published a study report which emphasized the fact how the food price inflation was impacted by climate change. This report of RBI clearly depicts its concern about its role to influence the flow of sustainable finance. RBI has broadened the guidelines of priority sector lending. RBI has now included the social infrastructure lending and lending towards renewable energy projects within the periphery of target of priority sector lending.
If we talk about the potential available in India for sustainable finance, one estimate states that India will need approximately US $4.5 trillion by 2040 for achieving target of urban sustainability and renewable energy only. During the unexpected knocking of COVID-19, people across the globe became more concerned with this environmental and social governance – ESG issues. Sudden arrival of COVID – 19 pandemic projected the importance of sustainable practices in the area of economic and financial activities.
The growing concern amongst all stake holders to reduce the level of carbon footprints in our every developmental effort is an encouraging sign. Everywhere people are taking steps to minimize the hazardous impact on nature. Governments are also reframing its policies according to the needs of sustainable requirements. Bankers are stepping ahead to increase sustainable finance. Private players are also instrumental in leaving sustainable footprints.
Hence, it can be said that India is well aware about the significance of sustainable finance. It has already started its initiatives. I believe that our country will play a leading role in creating a sustainable ecosystem.
Vinay Kumar
Manager,
State Bank Institute of Learning and Development, Deoghar.
