Green finance: India's financial system needs to align with nation's climate priorities

ESG investing in India is growing quickly and options are available for all categories of investors. Image: Shutterstock

Since the outbreak of the pandemic in 2020, we saw the world waking up to environmental issues, social concerns, and the need for transparent governance. Climate change, energy consumption, pollution control, and human rights have gone from being merely talking points to genuine issues while making responsible investment decisions. India, being home to over 1.35 billion people, has formidable challenges concerning the environment and infrastructure, which must be addressed to truly realise the ambition of becoming a $5 trillion economy.

To ensure our commitment to the Paris Agreement and the United Nations Sustainable Development Goals (SDGs), we as a progressive nation must mull over green finance as a key priority. As India’s financial sector evolves, we have a lot to learn from other leaders in green finance and incorporate sustainable mandates in its investment decisions going forward. As a prerequisite, we need to devise an integrated policy approach and a comprehensive plan that aligns with the country's financial system while also taking into account the environmental risks.

Green Finance and ESG go hand in hand

Although nascent, ESG (environmental, social, and governance) investing in India is growing quickly, and options are available for all categories of investors. From venture capital, private equity, and institutional investors to family businesses, and high net-worth individuals, various ESG funds have emerged. The expanding relevance of ESG factors in India is now reflected even in the capital-raising efforts with India Inc. issuing about $5 billion through ESG bonds so far in 2021, more than in any of the preceding years.

Green financing has also gained significant momentum in 2020 with the tide still going strong in 2021. Regulators across Asia have increased their efforts to promote the growth of green finance for a sustainable future. When compared to 2019, fund flows into ESG investments increased dramatically in 2020. Green finance bonds achieved an all-time annual high of $544.3 billion in 2020, while ESG fund assets under management in Asia surpassed $60 billion in end-December 2020, more than twice that of 2019.

As we are already in the second half of the year, we see optimistic trends for sustainable investment in India that will contribute to the expansion of ESG agendas. China led the world by making a large number of deals during this time, accounting for 20 percent of the total sustainable deal-making activity, followed by the US at 9 percent, and India and Italy at 7 percent.

A look into India’s green building finance

According to the International Green Building Council (IGBC), green buildings consume less water, are more energy-efficient, save natural resources, produce less waste, and provide healthier environments for its residents. In India’s case, residential and commercial buildings utilise more than 37 percent of the country's electrical energy, and certified green buildings save up to 20 percent to 30 percent on energy, and 30 percent to 50 percent on water. Hence, both, the need and the scope of green building construction in India are promising.

With 70 percent of the buildings needed by 2030 yet to be built, India is at an inflection point of a construction boom and has the potential to emerge as the largest green building market in the world. Given the market size, financing green buildings across the housing, retail, commercial, health, and hospitality sectors, presents a viable market as well as the opportunity for banks and financial institutions to support green growth.

However, the number and type of products offered by retail banks in India are currently confined to green home loans or green mortgages with no data available on the proportion of green home loans to overall housing credit. Retail banks should begin by incorporating green value into all sorts of construction loans through innovative products and processes that would accelerate the transition to green buildings and provide a major boost to the sustainable growth strategy.

Progress in India and the way forward

India is in a race against the clock to accomplish its climate goals and greening all finance has become a priority. This calls for a cohesive approach, concrete efforts, and a shared vision among policymakers, regulators, and participants in the financial sector. All of this must be done while keeping the country's socioeconomic factors in check. The way forward is to elevate the dialogue at the highest levels and bring the paradigm shift in narratives with a strong emphasis on sustainable financing.

As India has made a significant commitment, both in the Paris Agreement and in the SDGs programme, there are going to be more disclosures on how India Inc.’s corporate objectives would align with the national objectives in the near future. Hence, we should develop a unified approach around ESG investments, green guidelines, financial products, as well as define the roles of the private sector, public sector, bankers and asset managers. This will not only stimulate the action to align the whole financial system with green finance but also drive the engine of sustainable growth in the country.

The author is CFO India, Holcim Group and CFO, Ambuja Cements Ltd.

The thoughts and opinions shared here are of the author.