On the heels of its February 8 monetary policy statement, the Reserve Bank of India said it would issue a set of guidelines on three areas of climate finance: a broad framework for the acceptance of green deposits; a disclosure framework on climate related financial risks; and a similar framework for climate scenario analysis. If ‘green’ or ESG funding has shot into the limelight in recent years, it is for two reasons.

The first is that the climate scenario is dire and multilateral funds are not showing up, thereby placing the onus on market solutions such as raising money through equities, bonds and deposits. Climate concerns have made it increasingly important for businesses to showcase their ESG credentials by tapping into such funds. The second, less acknowledged, is that ESG norms in the West could become a non-tariff barrier for Indian exports, creating knock-on effects for banks. Hence, banks need to be prepared to bake ESG/climate risk into their appraisals of projects, going beyond market and liquidity risks – a point made by the RBI’s July 2022 discussion paper.

The banks need to develop expertise in three areas: climate assessment of regular projects, appraising ESG projects, and creating confidence among investors so that climate debt instruments attract funds even at lower tenures. The last can become a challenge, if ESG does not shrug off its global tag of being hijacked by the ‘greenwashing’ brigade (those who conceal polluting businesses by using such funds for eco-friendly pursuits). An MSCI report on ESG trends in 2023 observes: “the honeymoon period may be starting to wane, as yield spreads of green bonds have remained lower (eight basis points on average) compared with conventional bonds...investors may also be weighing the credibility of green bonds — and specifically the “greenness” of the activities they are funding.” Green bonds accounted for 1.7 per cent of the $100 trillion bond market in 2020. According to the report, a fifth of the over 600 bonds assessed between January 2021 and September 2022 were not truly green. India is not untouched by the credibility question, even as its private green bond issues by 15 Indian corporates amount to just over ₹4,500 crore as on September 2022 (Economic Survey 2022-23). Green deposits can power desirable projects by delivering credit at low cost, provided investors are convinced that funds are put to good use. The successful issue of the ₹16,000 crore sovereign green bonds, with the end uses being clearly spelt out, points to the credibility factor. Assets under management of ESG funds, at about ₹10,000 crore, are lower than 2021 levels – an ecosystem push can alter this.

The climate appraisal skills of banks can be developed in concert with SEBI (whose sustainability reporting standards for the top 1,000 listed entities are fairly detailed with end-use provisions) and IRDA. A separate body can be set up to develop this domain expertise.