In a world headed for major climate change catastrophes and global warming crisis, businesses are becoming increasingly aware of their responsibilities. Green financing is one such tool for a business to meet their sustainability goals. Compliance Calendar strongly believes in supporting businesses in their journey towards growth rooted in environmental ethics. In this article, we trace the opportunities and regulatory framework around green financing in India, while also highlighting crucial challenges.

Green Financing covers a gamut of financing alternatives - from green bonds, to green loans, green grants from national and international organisations, all aimed at promoting eco-friendly economic growth. In India, green financing has gained significant importance as the country aims to address climate change, reduce carbon emissions, and promote renewable energy and sustainable development.

» Green Bonds: In 2015, Yes Bank became the first offeror of green bonds in India, having raised more than INR 1600 crores since then. Green bonds are debt instruments, which can be issued by government, municipalities, and corporations to raise funds for climate-friendly projects. In India, both public and private entities have issued green bonds to finance renewable energy projects, energy efficiency initiatives, sustainable infrastructure development, and other environmentally beneficial projects.

» Government schemes: The Production Linked Incentive scheme was launched as part of Budget 2021-22, with an outlay of INR 19500 crores for promoting indigenous solar module manufacturing. In the latest budget (2023-24), an allocation of INR 20,000 crores has been made for financing Green Hydrogen based projects.

» Government’s concessional loans: The Government of India has launched initiatives to encourage green financing by offering loans at concessional rates. Several institutions like the Indian Renewable Energy Development Agency (IREDA) and the Small Industries Development Bank of India (SIDBI) provide specialised financing schemes and incentives for green projects.

» Renewable Energy Financing: India has set ambitious targets for renewable energy capacity, including solar, wind, and hydropower. To achieve these goals, various financial institutions, including banks and non-banking financial companies (NBFCs), provide loans and financial support to renewable energy developers and project sponsors. Renewable energy also counts as Priority Sector Lending under the RBI framework, making it compulsory for banks to grant loans to this sector.

» Partnerships and International Support: India collaborates with international organisations, such as the International Finance Corporation (IFC) (part of the World Bank), the Green Climate Fund (GCF), UN Environment Program, and international collaborations such as the India-USA Strategic Clean Energy Partnership (2022) to mobilise green finance. These partnerships facilitate the flow of capital and expertise to support sustainable development projects in the country.

Until now, only large Indian companies were able to launch green bonds, due to huge operational costs involved. However, with RBI’s new circular (dated April 11, 2023) on green capital financing via banks and NBFCs, many mid-sized companies would get green credit to direct towards their sustainable projects. Concessional loan terms are also being offered by many banks (with at least 25 basis points lower interest rate between green loans and regular term loans).

Availing “Green Deposits” from Banks and NBFCs - Here’s how to tap into green financing for your business

The financial sector plays a crucial role in climate change by directing funds to projects and businesses that positively impact emissions and global warming. In this regard, the Reserve Bank of India, in April 2023 has released a set of guidelines for green deposit facilities (Framework for Acceptance of Green Deposits), applicable to both banks and NBFCs. As per these guidelines, green deposit is defined as an interest-bearing deposit, received by the regulated entity (banks)for a fixed period and the proceeds of which are earmarked for being allocated towards green finance.

- Renewable energy & energy efficiency
- Green transport
- Green buildings
- Green technologies
- Carbon emissions reduction
- Water and waste management services
- Climate adaptation and resilience services
- Improving natural ecosystems and biodiversity
- Pollution control

This framework comes into effect from June 1, 2023 and will encourage banks and financial entities to offer green deposits to startups, customers, businesses and other entities to maintain adequate flow of credit to green projects.

» Financing decisions by banks: A Board-approved Financing Framework has to be constituted by banks for allocation of green deposits.

» Reporting and Disclosure by Banks: All scheduled banks and entities within RBI’s regulatory framework have to place a review report before its Board of Directors within three months of the end of the financial year covering the following details:

» list of green activities/projects to which proceeds have been allocated, along with a brief description of the projects

» a copy of the Third-Party Verification/Assurance Report and the Impact Assessment Report.

Financing Framework for effective allocation of proceeds of green deposits, specifying the following –

» Process of project evaluation and selection including monitoring and validation of sustainability information of the borrower

» Third party verification of allocation of proceeds - The allocation of funds to a business entity will have to be subject to verification by an independent third party, who will certify the use of proceeds in accordance with eligible green activities. The surveyor will also review policies and internal controls with respect of project evaluation and disclosures.

» Impact Assessment - Based on the RBI circular, impact assessment is voluntary for FY 23-24, but has to be mandatorily complied with from FY 24-25 onwards.

» Particulars of temporary allocation of green deposit proceeds pending allocation, have to be mentioned by the bank.

The recent RBI circular mentions the following list of activities that are ineligible, and hence barred from availing credit through green financing mechanisms. This includes a list of activities that cause climate change and global warming, such as:

- Projects involving new extraction, production and distribution of fossil fuels

- Renewable energy projects that generate energy from biomass using feedstock originating from protected areas.

» According to ICMA’s Green Bond Principles, “the net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner". Thus, the amount raised via green bonds must be made a sub-category as part of liabilities.

» Globally, under the ISFR accounting, green bonds are categorised as IFRS 9 - Financial Instruments. Their accounting value for an investor can be based on considerations involving projected contractual cash flows, fair value of the bond and profits and losses incurred.

Challenges in tapping green financing resources

Being a nascent developing sector, there exist several challenges in tapping into green finance resources. Some of these are:

» Secondary market access- For green bonds, the secondary market is still at a nascent stage. Investors are often sceptical of making green investments due to lack of liquidity in the secondary market.

» Valuation issues- An environmentally sustainable project may not become economically viable for several years until after its operation. This may lead to ambiguity in valuation, estimating cash flows and projected environmental benefits.

» Lack of tax benefits for investors in green financing in India, is a major factor that deters development of a thriving green financing capital market.

Green financing for businesses in India is playing a crucial role in accelerating the transition to a low-carbon economy and achieving our environmental goals. At Compliance Calendar, we truly believe in powering businesses in accessing financial resources to support their sustainable projects which often involve large costs. For meeting your green financing needs, connect with our financial experts and get the best advice on funding your green idea today.