Banks would need to be incentivised to provide support in terms of transition finance for businesses and sectors that are not so green, to adopt cleaner technologies, increase energy efficiency and become greener over time, said M Rajeshwar Rao, Deputy Governor, Reserve Bank of India.

“To move the needle towards net zero (emissions by 2070), we must progressively decarbonise all sectors of the economy, including the hard-to-abate ones. This means that we would need to incentivise banks to provide support…

“Green finance can play a crucial role in making India’s economy resilient to climate change impacts,” the Deputy Governor said in his address at a BFSI summit organised by a financial publication.

Rao said one of the notable features of India’s financial ecosystem is that while rest of the world is still grappling in developing new instruments to funnel funding to green and sustainable companies and projects, it already has a well-accepted incentive-based instrument in the form of Priority Sector Lending (PSL) norms to encourage lending to such projects.

He emphasised that banks and financial institutions have always been the backbone of India’s economic growth and as the country pivots to sustainable growth, they will have to take a lead and accelerate green lending.

Structural changes in lending

“To support this acceleration, a number of structural changes may be needed in the traditional lending approach, including evaluation and certification of the green credentials of projects.

“In order to give focused attention to scaling up green finance, banks and financial institutions would have to invest in human resources and capacity building efforts as well as integrate environmental and social risk considerations into their corporate credit appraisal mechanisms,” the Deputy Governor said.

Rao underscored that a formal definition of green finance, along with a taxonomy, is the need of hour as it would enable more precise tracking of finance flows to green sectors in India, which, in turn, would help design effective policy, regulations and institutional mechanisms directed towards increasing both public and private investments.

Mitigating greenwashing risk

A taxonomy would also help banks and financial institutions in better assessing the climate risk in their loan portfolio, scaling up green and sustainable finance and mitigating the risk of greenwashing.

“Another key challenge in scaling up green finance is the availability of a robust ecosystem for third party verification / assurance and impact assessment and the green credentials of businesses and projects.

“This would also address potential greenwashing concerns and ensure unhindered flow of capital and funding to the entities,” he said.

The challenge regarding the availability of data and disclosures would also need to be addressed quickly.

“In this context, the disclosure standards prescribed by SEBI for top 1000 listed entities by market capitalisation is a welcome step.

“I am confident that the listed entities would not only adhere to the mandatory disclosures but would also not hesitate to follow those which are additional and voluntary in nature,” he said.

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