Greenbacks For Greening
Naina Lal Kidwai
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India needs a finance system that promotes ecologically sustainable industry
As the world journeys towards the Paris conference at the end of this year to build a global climate change architecture post 2020, and to finalise the sustainable development goals that will replace the millennium development goals from 2015 onwards, financing becomes the critical pillar to move towards these global goal posts. India is racing ahead to set its own vision and domestic ambitions, scaling up its clean energy targets, planning 100 smart cities, setting strong energy efficiency measures.Fixing financing needs incrementally, in a piecemeal manner, would not be sufficient in the context of scaled up targets. The ambitious targets set by Prime Minister Modi for the next five years would require the financial regulatory architecture to undergo a massive change.
A vibrant corporate bond market is key for financing of the renewable sector, indeed for all infrastructure financing.As the banking sector is up to its limits in power sector exposure, i fear renewables will get squeezed out. Ideally the banking sector should provide early stage finance with the takeout being through the issue of bonds in the capital markets.
We would need to align the financial sector towards a green agenda. Clean energy is an imperative for energy security and access. While we need massive funding to flow into this sector, the paradigm shift would come from creating a sustainable framework for the financial sector that would change the rules of the game for financial institutions and create the appeal for financing `green'. Emphasis needs to be put on debt and equity products, as also the banking sector and capital markets.
Efforts must be made to establish a market-based mechanism that channels private capital investments into protection of the environment. This would require the government, RBI, Sebi and Irda to work together to formulate the policies that foster this development.
Restricting excessive investments in polluting sectors and incentivising pri vate investments in green industries, as well as leveraging the magnifying effect of limited government funding so that private green investments can snowball to several or even over ten times of the government contribution, will be the key to promoting green economic growth, facilitating structural transition, reducing pollution and fostering new growth drivers.
We should expedite the development of a green finance system for directing private investments to green industries and projects. We need to direct our pension funds and insurance companies to hold some green investments as is the case with global funds in these sectors.Green ratings, green stock indices and mandatory disclosures can help steer funds into green industries. We also need to set norms for our banks on the style of the Equator Principles which ensure that minimum standards for environmentally sound projects are set and that companies which do not meet this standard cannot access finance.
The business case for financing of sustainability has to be created. The UNEP In quiry on Designing a Sustainable Financial System along with FICCI has set up an India Advisory Council to propose practical solutions for creating a framework for sustainable financing. In its interim report, the Council creates the argument for developing a sustainability oriented market framework that would eventually catalyse capital flow towards clean energy and other sustainable development priorities.
There are some bottlenecks that impede the flow of finance into the sustainability sector which require attention.We need bankable projects, and credit en hancement products will help make such projects more readily financeable. Building stronger green development financing institutions such as the Indian Renewable Energy Development Agency by increasing its bank book size, garnering additional lines of credit and long tenor financing, and making it well positioned to deploy global green funding, would enhance financial flows to clean energy.
India has an extensive regulatory framework for the financial sector. Indian banking regulations and RBI directives hold the power to direct credit to specific sectors and further influence interest rates, exposure limits, incentives, security and other terms and conditions of lending to various sectors. We should direct priority sector lending policy towards funding of `sustainable' businesses by allowing them to qualify for priority sector lending. As of now, 40% of bank lending in India is directed into sectors that qualify for priority sector lending, but renewables and energy efficiency are not included in this definition.
Another key priority in the effort to align financial architecture towards a green agenda would be enabling the institutional finance ecosystem through measures such as green flagging investments into companies that are transparent and resource efficient. This will ensure financing is effectively channelled to those that are ahead of the greening threshold.
We could channel global climate finance into existing public expenditures on climate mitigation and adaptation to augment the ongoing effort under central and state government budgets.
The global green bond market saw $34 billion of issuance last year, growing rapidly from only $10 billion the previous year. Green bonds could provide innovative routes for green project financing.The market for these innovative products needs to be developed with urgency to allow long term finance into sustainable development priorities. The green asset class will emerge as the raison d'etre of the future corporation. It is time the financial sector realigns itself towards the green asset class and the green economic agenda of the future.
The writer is Chairperson, HSBC India
A vibrant corporate bond market is key for financing of the renewable sector, indeed for all infrastructure financing.As the banking sector is up to its limits in power sector exposure, i fear renewables will get squeezed out. Ideally the banking sector should provide early stage finance with the takeout being through the issue of bonds in the capital markets.
We would need to align the financial sector towards a green agenda. Clean energy is an imperative for energy security and access. While we need massive funding to flow into this sector, the paradigm shift would come from creating a sustainable framework for the financial sector that would change the rules of the game for financial institutions and create the appeal for financing `green'. Emphasis needs to be put on debt and equity products, as also the banking sector and capital markets.
Efforts must be made to establish a market-based mechanism that channels private capital investments into protection of the environment. This would require the government, RBI, Sebi and Irda to work together to formulate the policies that foster this development.
Restricting excessive investments in polluting sectors and incentivising pri vate investments in green industries, as well as leveraging the magnifying effect of limited government funding so that private green investments can snowball to several or even over ten times of the government contribution, will be the key to promoting green economic growth, facilitating structural transition, reducing pollution and fostering new growth drivers.
We should expedite the development of a green finance system for directing private investments to green industries and projects. We need to direct our pension funds and insurance companies to hold some green investments as is the case with global funds in these sectors.Green ratings, green stock indices and mandatory disclosures can help steer funds into green industries. We also need to set norms for our banks on the style of the Equator Principles which ensure that minimum standards for environmentally sound projects are set and that companies which do not meet this standard cannot access finance.
The business case for financing of sustainability has to be created. The UNEP In quiry on Designing a Sustainable Financial System along with FICCI has set up an India Advisory Council to propose practical solutions for creating a framework for sustainable financing. In its interim report, the Council creates the argument for developing a sustainability oriented market framework that would eventually catalyse capital flow towards clean energy and other sustainable development priorities.
There are some bottlenecks that impede the flow of finance into the sustainability sector which require attention.We need bankable projects, and credit en hancement products will help make such projects more readily financeable. Building stronger green development financing institutions such as the Indian Renewable Energy Development Agency by increasing its bank book size, garnering additional lines of credit and long tenor financing, and making it well positioned to deploy global green funding, would enhance financial flows to clean energy.
India has an extensive regulatory framework for the financial sector. Indian banking regulations and RBI directives hold the power to direct credit to specific sectors and further influence interest rates, exposure limits, incentives, security and other terms and conditions of lending to various sectors. We should direct priority sector lending policy towards funding of `sustainable' businesses by allowing them to qualify for priority sector lending. As of now, 40% of bank lending in India is directed into sectors that qualify for priority sector lending, but renewables and energy efficiency are not included in this definition.
Another key priority in the effort to align financial architecture towards a green agenda would be enabling the institutional finance ecosystem through measures such as green flagging investments into companies that are transparent and resource efficient. This will ensure financing is effectively channelled to those that are ahead of the greening threshold.
We could channel global climate finance into existing public expenditures on climate mitigation and adaptation to augment the ongoing effort under central and state government budgets.
The global green bond market saw $34 billion of issuance last year, growing rapidly from only $10 billion the previous year. Green bonds could provide innovative routes for green project financing.The market for these innovative products needs to be developed with urgency to allow long term finance into sustainable development priorities. The green asset class will emerge as the raison d'etre of the future corporation. It is time the financial sector realigns itself towards the green asset class and the green economic agenda of the future.
The writer is Chairperson, HSBC India
