Subject

Project Appraisal & Investment

Title
Green Financing of India
Submitted by Raja Asim
Roll No. 04
BS-Commerce 8th
Submitted to
Prof. Faisal Abbas
Date 24-06-2021

Project Presentation
 Green Financing of India
Background
The history of capital market is of 200 years, initially established under the rule of East India
Company. Besides being one of the oldest across the globe, vital to self image as an independent
nation was the establishment of constitution, providing the basis for putting a democratic
republic in place. To date, it has invigorated civic rights, an active Supreme Court and a largely
independent press. Ever since the nation start in a burst of economic reforms starting in early
1990s, financial markets of India have undergone a metamorphosis which has posted impressive
growth across several dimension and made India the world’s fifth largest economy with an
annual GDP of nearly US-$ 3 billion (IMF, 2019).
Policymakers of India have repeatedly committed their responsibility in aligning the country’s
economic growth mission with environmental protection. On these grounds, various domestic
public and private sector organizations have launched green financing initiatives, addressing
monetary gaps in achieving sustainable economic development. The implementation of a
national plan to pursue the climate change actions. India agree to in the Paris Agreement requires
more than US-$ 2.5 trillion2 between 2015 and 2030 (Government of India, 2015), necessitating
driving innovations across banking, insurance, investment products and financial instruments as
well as capacity of financial system and readiness to respond to the sustainable development
goals. Here, green bonds play a pivotal role, enabling inclusive, resilient and cleaner economic
growth while creating environmental benefits simultaneously.
Alike regular bonds, green bonds are fixed-income securities used to raise capital from investors
through the debt capital market. Typically, the bond issuer raises fixed amount of capital, the
principal, from investors over set period of time, maturity, provides fixed periodic interest
payments, called the coupon, and repays the principal amount at maturity. But on the other hand,
the proceeds of green bonds are earmarked towards financing green projects exclusively. The
designation as green is applied by the issuer, a public or private entity via its inclusion in a green
bond index, or via a tag on analytical tools widely used in financial markets.
Since India’s central bank, issued the first circular on banks decisive role as to CSR and
sustainable development, stressing their responsibility of incorporating human rights and
environmental concerns into corporate activities important steps and progressive measures for
facilitating sustainability within the country’s financial sector have been taken. The initial green
financing actions were undertaken without a definition of what constitutes a green bond or of the
process to be followed in place, but in 2017, SEBI set out the country’s green bond framework.
India was further able to expand the issuer base from multilateral development banks to
government backed entities and private sector banks. Nowadays, majority of green bonds issued
are even verified by auditors, renewable energy consultants, or second opinion providers. But
green bond projects are slanted towards energy goals, and international investors still remain
absent. And eventually, India’s green financial market has not been able to sustain its growth.
Defining Green Finance is the first step towards directing finance to green sectors. Defining
Green Finance should be the initial step in India’s Green Finance strategy which facilitates
increased capital allocation to green sectors and supports its NDC commitments. Other likely
components of this strategy include a) designing policy and regulatory incentives; b) improving
reporting and disclosure practices; and c) launching green financial products.

Introduction:-
Green finance refers to the financial arrangements that are specific to use for
projects that are environmentally sustainable or projects that adopt the aspects of climate change.
Environmentally sustainable projects include the production of energy from renewable sources
like solar, wind, biogas, etc.; clean transportation that involves lower greenhouse gas emission;
energy efficient projects like green building; waste management that includes recycling, efficient
disposal and conversion to energy, etc. Moreover, project defined sustainable under the
disclosure requirement for Green Debt Securities include climate change adaptation, sustainable
waste and water managements, sustainable land use including sustainable forestry and
agriculture, and biodiversity conservation. In order to meet the financial needs for these types of
projects, new financial instruments such as green bonds; carbon market instruments such as
carbon tax and new financial institutions such as green banks and green funds are being
established. They together constitute green finance.
Green finance is central to the overall discussion on sustainability of economic growth. Rapid
economic development is often achieved at the cost of environment. Decreasing natural
resources, degraded environment and increasing day by day pollution are hazardous to public
health and pose challenges to sustainable economic growth. In order to protect and substantially
improve the environment, nations around the world have been increasingly focusing on the use
of ecofriendly technologies. However, it requires appropriate incentive structure for increased
allocation of funds towards setting up or adopting environmentally sustainable projects. Once
funds are freed from the conventional industries and are channeled into the green and
environment- friendly sectors, other resources including land and labor may also follow. This
eventually leads to an optimal allocation of resources that support sustainable growth in the long
run. In order to achieve these objectives, targeted policies on green finance have been formed in
major countries involving all stakeholders of economic growth, viz., corporates, governments
and central banks

Sustainable development in alignment with economic growth is becoming a great challenge

globally. With the increase in awareness about the environmentalism, it becomes essential for the
finance sector to become concern about its role in handling environmental issues. As per IPCC,
2018, investment of USD 1.6-3.8 trillion energy system will be required to keep warming within
a 1.5 degree Celsius. In order to reach its 2030 climate targets, European Union will be required
to invest additional €180 billion per year in energy efficiency and renewable energy. In order to
build sustainable infrastructure, Asia also requires investments of US$1.7m per year. Therefore,
role of financial sector will become important in the sustainable development in the coming
years. The concept of Green finance will help in securing balanced and sustainable growth.
Green finance basically comprises all forms of financial instruments such as green bonds and
instruments along with financial institutions such as green banks and green funds that are
involved in the investment of environmentally sustainable products and projects. Green financing
or climate- smart financing helps to decrease carbon emissions and increase environmentally
friendly results over the long-term. Market-based innovations are driving the development of
green finance. According to the World Economic Forum investment in green infrastructure is
projected to be $5 trillion per year until 2030 and much of which will be in the developing world.
India will also require infrastructure funding of about $4.5 trillion by 2040 and this funding is
projected to be utilized in national renewable energy targets, electric vehicles and green housing.
Strong financial support and timely policy interventions from the Government of India have
played impotant role in accelerating the growth of renewable energy sector of country. But given
current rates of penetration and the overall health of the sector combined with slowdown created
by the COVID-19 pandemic, the government will have to find new and alternative ways to
finance the transition and incentivize private sector participation to scale up investments for a
sustainable and transformational impact. International finance is also likely to come with “green
strings” attached. Therefore, identifying and analyzing key sources of finance, the instruments
used for mobilizing and dividing funds, and their ultimate benefits become critical for diagnosis,
planning and monitoring green investments in the country.
The Landscape of Green Finance in India is one-of-a-kind study undertaken by Climate Policy
Initiative that presents the most comprehensive information on green investment flows in the
country in FY 2017-FY 2018. The study tracks both public and private sources of capital and
builds a framework to track the flow of finance from source to end beneficiaries.

Problems
In India the problem of green finance has been assessed from time to time. The State-wise
figures of excess salt concentration worked out by the Working Group of finance Ministry of
green finance resources are given in Table.
Inspite of the growing realization of the urgent need for farmers participation in the management
of green finance, the progress has been slow so far. It is estimated that today only 8, 04,000 are
being managed by green finance development

 Indian green bond market is at an emerging stage and it has not been able to attract ample
number of investors. Investors have a tendency to invest in highly rated bonds or low risk
investment options. The bond market requires proper framework for making these bonds
attractive to the investors.
 Due to high cost of debt capital the investment in green projects becomes very expensive.
High cost of debt is attributed to the factors like high rate of interest, short maturity
period and non existence of non recourse debt.
 The current market practices, regulations monitoring the market and financial incentives
are becoming a great hurdle in the success of financial instruments.
 Several risks associated with the green finance in the form of technology related risk,
currency risk, off taker risk becomes hurdle in the availability of financial resources.
 Lack of awareness amongst the investors about the innovative financial instruments also
creates hurdle in green financing.
 Lack of efficient framework for project evaluation of a sustainable project mainly in case
form early stage innovation becomes a challenge for channelizing funds towards green
projects.

Significance
Green financing is to increase level of financial flows i.e. from banking, micro-credit, insurance
and investment from the public, private and not-for-profit sectors to sustainable development
priorities. A key part of this is to better manage environmental and social risks, take up
opportunities that bring both a decent rate of return and environmental benefit and deliver greater
return. Green Finance is important as it promotes and supports the flow of financial instruments
and related services towards the development and implementation of sustainable business
models, investments, trade, economic, environmental and social projects and policies. As the
financial sector plays a key role through its intermediary functions and risk management in
advancing sustainable economic development while directing investment to the real economy,
the intertwinement of these two is crucial.
Green financing could be promoted through changes in countries regulatory frameworks,
harmonizing public financial incentives, increases in green financing from different sectors,
alignment of public sector financing decision making with the environmental dimension of the
Sustainable Development Goals, increases in investment in clean and green technologies,
financing for sustainable natural resource based green economies and climate smart blue
economy, increase use of green bonds, and so on. The main areas for the current work on green
financing are:

 Supporting public sector on creating enabling environment

 Promoting public-private partnerships on financing mechanisms such as green bonds
 Capacity building of community enterprises on micro-credit.

Questions
Q1 What are the Green banking initiatives of leading Indian public and private banks?
The Green banking initiatives are divided into three major categories: green products
development, green corporate social responsibility and green internal process. Different products
introduced under different heads by different banks under consideration. All the 36 respondents
agreed that the twelve public sector and private sector banks are using these Green banking
initiatives.
One branch manager of a leading public sector bank stated: The bank has come up with several
green products and services like green loans/green financing of energy efficient projects,
promote renewable energy, green vehicle finance, loans for constructing green buildings etc.
Another branch manager stated: My bank is involved in several green corporate social
responsibility activities as a part of green initiatives like tree plantation campaigns, maintenance
of parks,
Another AGM said: Implementing green banking has always been a major issue but it plays an
important role in the development of a developing nation like India.
Majority of the bank employees agreed that now both public and private sector banks are taking
steps to implement Green banking initiatives.
Q2 What are the major challenges for Indian banks towards “going green”?
In a country like India with literacy rate of 70% on an average, green banking is still at a nascent
stage and desired results have not been achieved. The analysis revealed that there were multifold
reasons attributed to it. The bank employees provided very valuable and honest insight during
the semi structured interviews.
One of the regional managers commented: People have trust issue with green goods and services.
Most of the customers are uncomfortable adopting new tools and technologies.
There were several other comments as mentioned below:

 Staff training is a major task as few older staff are reluctant towards the change.
 Green goods and services increase bank’s cost at least initially though reduces
administrative cost in the long run.
 The major problem bank faces in this process is of customers not accepting the online
transactions happily.
 Customers are skeptical towards safety in transactions undertaken online; however,
educated people easily adopt green technologies.
Majority of the bank employees agreed that a proactive way of future sustainability is Green
banking, but banks in India are running far behind their counterparts from developed nations
because of lack of education, lack of awareness and lack of preparedness of Indian banks to
implement green initiatives.
Q3 How the Green banking initiatives contribute towards creation of Green trust?
Green trust is a willingness to rely on a product, brand or service or expectation arising out of its
environmental performance. The Green banking initiatives if successfully explained and
implemented will enhance customer’s trust in bank and will positively influence their purchasing
decisions.
One of the bank managers stated: Bank’s priority must be to make customers do everything
themselves digitally without being dependent on bank. This will increase their confidence and
enhance their trust on the bank.
Hence, based on comments received it can be affirmatively concluded that Green banking
initiatives in the form of green products and services, green corporate social responsibility and
green internal process can go a long way in creating Green trust of all stakeholders .
Q4 How the Green banking initiatives contribute towards creation of Green brand image?
Researchers studied the relation amid green banking and Green brand image resulting to the
conclusion that a positive relation actually exists amid the banks undertaking Green banking
initiatives and the development that takes place in terms of improving the banks brand image.
One manager stated: Green initiatives have influenced all our eco-friendly and environmentally
concerned consumers and they through positive word of mouth have augmented bank’s green
image within the society.
It can be concluded that 63% of the total respondents were of view that their bank indulges in
development of several green banking products and services; 53% of the bankers said that their
bank incorporates green internal processes in their daily activities; 78% respondents said that
their bank undertakes several GCSR actions like marathon for promoting sustainability,
reduction of carbon footprints, green loans, green mortgages etc.; and 22% of respondents were
of view that their bank still has a long way to go for fulfilling its green corporate social
responsibilities.

Objectives
Green finance can play a crucial role in making India's economy resilient to climate change
impacts. The financial sector can play a vital role in mitigating overarching climate change risks
by converting capital from the carbon emitting sectors to the carbon-mitigating sectors. Two
main goals of green finance are to internalize environmental externalities and to reduce risk
perceptions. Promoting green finance on a large and economically viable scale helps ensure that
green investments are prioritized over business-as-usual investments that perpetuate
unsustainable growth patterns. Green finance encourages transparency and long-term thinking of
investments flowing into environmental objectives and includes all sustainable development
criteria identified by the UN Sustainable Development Goals (SDGs).
Green finance covers a wide range of financial products and services, which can be divided into
investment, banking and insurance products. The predominant financial instruments in green
finance are debt and equity. To meet the growing demand, new financial instruments, such as
green bonds and carbon market instruments, have been established, along with new financial
institutions, such as green banks and green funds. Renewable energy investments, sustainable
infrastructure finance and green bonds continue to be areas of most interest within green
financing activities.

Literature review
Green banking was initially introduced in the year 2009 in State of Florida. In India, SBI (state
bank of India) being the largest commercial bank took a lead towards setting higher standards of
sustainability and undertook foremost step towards “green banking” initiative. SBI was the first
bank to inaugurate wind farm project in Coimbatore. Green banking is a form of banking activity
where the banks take initiative to do its daily activates as a conscious entity in the society by
considering in-house and external environmental sustainability. The banks who do such type of
banking activities are termed as socially responsible and a sustainable bank or green bank or
ethical bank.
According to Indian Banks Association, green banking refers to a normal banking system which
involves all environmental as well as social factors with an aim to ensure ecological
sustainability and optimum use of natural resources. Government said that banks involve a shift
from traditional towards sustainable practices and social, governance and environment criteria
are being integrated into their core strategy. The concept of green corporate social responsibility
in banking and pronounces that a green bank offers savings accounts to stakeholders, ensuring
that the savings will finance sustainable projects. He developed a framework to assess the social
responsibility of global banks and further tested it on 30 institutions and concluded that there is a
positive and significant association between a bank’s CSR score and its financial size and
quality. Development of green products like green financial products, loans for renewable
energies, greener technologies, green lending and environmental management strategies is green
marketing in bank. This improves banks’ reputation and contribute towards sustainability. This
has motivated several banks implementing green strategies to invest in developing environmental
image to better prepare for future challenges.
According to (Dewi & Dewi, a author 2017), green banking promotes environment-friendly
practices in banking sector. He further postulated that green banking guides the bank’s core
operation towards sustainability. The adoption level of sustainable banking tools and classified
40 criteria into five heads. They further used content analysis to evaluate the sustainable
practices of Indian banks and concluded that green banking adoption is still at the nascent stage
in Indian banking.

Recommendations
India could leap frog the growth paradigms adopted by many other countries by directing
investment to solve its carbon emissions, equity and climate impacts challenges. The financing
will need to come from a combination of domestic and international sources. Offshore issuances,
aided by the MDBs could provide a huge learning experience, to structure issuances. It is
important to make policy changes to incentives investment in green technologies.
Establish a “green” taxonomy: The SEBI disclosure requirements for green bonds and
securities is a valuable first step in helping India define long-term sustainable investments and
mobilizing green finance, but it does not go far enough. The next step must be to establish a
comprehensive set of criteria for defining “green” assets in sync with international frameworks.
Formulate a national green investment strategy: The government should set out a “green”
investment program in consultation with the states and the private sector defining its vision,
direction and priorities for investment in both mitigation and adaptation efforts. This should
necessarily include levels of preparedness of different sectors to determine the right mix of
capital source, smart time bound incentive structures and institutional ownership and strategies to
build bankable pipeline.
Review and redesign Priority Sector Lending to introduce green sub-sectors with targets:
Banks have a special role to play in primary lending to households and businesses. Priority
Sector Lending sub-targets should be set on the basis of green taxonomy. This recommendation
will help track and motivate financial flows into the green economy but other measures will be
needed to kick-start bank lending.
Use the ABS to broaden the green bond market: Green bonds have typically been used to
fund large companies, backed by the companies’ balance sheets. Asset Backed Securitization
allows funding for assets secured on the strength of the cash flows earned by the assets
themselves, and independent of the credit scores of the borrower. This opens up capital markets
to mortgages, vehicle loans, agricultural and distributed renewable energy assets that have
reliable income flows. ABS deals have grown despite a shallow bond market and the segment
presents opportunities for green issuances to diversify into new sectors.
Further increase pension and insurance companies’ investment in green bonds:
Government has signaled its desire for corporations to increase share of funding from debt
capital markets by issuing bonds. There has been some relaxation by the pensions regulator in
the minimum credit rating allowed for bonds. It needs to follow through by further loosening
constraints on domestic savings being invested in the real economy, subject to appropriate risk
mitigation products being used.
Enable cities and sub-national government: Cities are responsible for establishing the
framework for delivery of much of the green infrastructure—waste collection and resource
recovery, water and sewerage, intra-urban transport and housing. There is a need to depolitics the
delivery, and ensure that competent bodies build and operate the infrastructure. There is also a
need to ensure user charges and local taxes can pay the debt service costs.

CONCLUSION
Green Banking has been boosting to improve the environment and promoting economic growth.
Until a few years ago, most traditional banks did not practice green banking or actively seek
investment opportunities in environmentally-friendly sectors or businesses. Indian banks are far
behind their counterparts from developed countries. If Indian banks desire to enter global
markets, it is important that they recognize their environmental and social responsibilities. Only
recently have these strategies become more prevalent, not only among smaller alternative and
cooperative banks, but also among diversified financial service providers, asset management
firms and insurance companies. Further, those industries which have already become green and
those, which are making serious attempts to grow green, should be accorded priority to lending
by the banks. This concept of "Green Banking" will be mutually beneficial to the banks,
industries and the economy. Not only "Green Banking" will ensure the greening of the industries
but it will also facilitate in improving the asset quality of the banks in future. There are lot of
opportunities and challenges for Indian banks in adopting ‘Green Banking’ as profitable
business. Green banking if implemented sincerely will act as an effective ex ante deterrent for
the polluting industries that give a pass by to the other institutional regulatory mechanisms.
Therefore, for sustainable banking, Indian banks should adopt green banking as a business model
without any further delay. Green finance is fast emerging as a priority for public policy. In this
study we review the developments of green finance in India and our findings indicate that there
have been some improvements in public awareness and financing options in India in recent
years. Existing literature suggests that a reduction in the asymmetric information regarding
Green Projects through better information management systems and increased coordination
amongst stakeholders could pave the way towards sustainable long term economic growth. At
this juncture, the world is fighting COVID-19 and its impact on global economic growth.
Undoubtedly, the immediate policy challenge is to kick-start the global economy. However, the
pandemic has also offered an opportunity to all stakeholders to rethink about the policies, and
financial and operational strategies that they have adopted so far and espouse an approach that is
more environmentally sustainable in the long run. Green finance is definitely an important mean
that can facilitate such a shift towards sustainable economic growth.

References
1. Ray Vareen, ‘A Green Dream’, 4P’s Business and Marketing, 21 Nov to 4 Dec 2008.

2. Leslie D Monte, ‘It’s Times for Green Banking’, Business Standard, May 21, 2010.

3. Ritwik Mukherjee, ‘SBI launches green policy for paperless banking’, Financial Chronicle, August 27,
2010.

4. Banking and Financial Markets in Maharashtra 1947 to 2007 by Niti Bhasin New Century publication,
New Delhi, June 2007 edition.

Green banking initiatives: a qualitative study on Indian banking sector | SpringerLink

https://www.ripublication.com/gjmbs_spl/gjmbsv3n10_21.pdf

https://www.google.com.vn/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjMs8DfwavxAhU1QUEAHU78
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%2F2017%2F03%2F2FMJan-4447.pdf&usg=AOvVaw1LACsEaLcX14n58Da12re0.

Green Banking: Issues and Challenges in India (ijltemas.in)

Thank You