In Budget 2022-23, the Finance Minister announced the launch of ‘green bonds’ to finance the greening of the economy and several fiscal measures and capex announcements to make India climate-friendly. This augurs well for policy aspirations of turning India into a $5 trillion economy by 2024, as climate change emerges as the single most significant obstacle.

Normal monsoon turning into floods and unseasonal heavy rainfalls have become a common phenomenon . Such extreme events lead to the loss of lives and livelihoods for many and disrupt businesses and economic activities, affecting thereby the economy’s growth momentum.

The United Nations Framework Convention on Climate Change (UNFCCC) was set up in 1994 in response to the need to combat the harmful effect of human economic activities on the climate system as a multilateral arrangement. From Montreal and Kyoto to the Paris Protocol, nations have negotiated the mitigation goals/commitments and cost-effective pathways to achieve those goals.

Identified cost-effective pathways include mitigation of greenhouse gas (GHG) emissions from both the supply and demand sides. Effective mitigation strategies would involve dynamic changes in technology, additional investments to induce behavioural change, carbon sequestration projects, enhancing the share of energy from renewable energy sources, sharing technology across the borders, etc.

All such climate change mitigation (CCM) strategies would involve one or another form of financing such as an investment in a project, or a capital expenditure involved in buying a piece of new machinery or modifying the existing one or for the transfer of technology.

To facilitate the same, keeping in mind the national priorities, policymakers and regulators have implemented policies for public investments and nudge private investments to achieve the final goal of promoting climate-friendly products and services. However, the world of finance has been catching up mostly from the ‘issuer disclosure’ perspective only.

The Budget announcement to issue ‘green bonds’ to reach the ‘net zero’ (a state in which GHG emissions are balanced by removal out of the atmosphere) goal is not only a step in the direction of compliance with the Paris Protocol through public funding of greener activities but also a call to investors to look at greener investment opportunities for sustainable livelihood.

Several such small steps jointly taken by the private and public sector institutions involved in investing/lending will put the nation on the path towards the ‘net zero’ goal. Finance (lending/investment) can play a significant role in nudging stakeholders to be climate-conscious. The current ‘ESG’ theme of investing is one way wherein investors shall deliver higher value to the environment apart from the social and governance objectives of ESG investors.

To promote fund flows into climate mitigation strategies, enough funds must be made available domestically and externally. Fund availability for any activity in the economy would be a function of potential risks/returns and the willingness of the investors to bear the same given the broader ‘common good’ such as CCM.

To stand with such common good, investors must understand the long-term implications and be willing to forego short-term expectations. While the ‘ESG’ as an investment theme has been emerging with adequate outreach amongst the investors, it is essential to take ‘net zero’ as a movement with a regulatory nudge and policy outreach.

Finance being a regulated function, connecting all CCM activities, can serve as an effective tool in greening the economy. In this context, it would be worthwhile to ponder the experience of the EU in bringing about the green transformation that the economy had been into.

The EU experience

The EU’s experience pioneering non-financial reporting will throw some light on the non-financial disclosures, especially on environmental aspects, for the investors to make informed decisions. Such non-financial disclosures specifically include the material environmental impact analysis of the business including its value chain. Continuous and diversified disclosures on various aspects of environmental matters, including direct and indirect atmospheric emissions, improvements in aspects such as energy efficiency, etc., will make investors aware of the climate implications and appropriately evaluate the financial products issued by them while pricing in the markets.

Additionally, such disclosures could also lead to businesses changing tracks driven by investor activism aided with information available through disclosures. While the current regulatory requirement of Business Responsibility and Sustainability Reporting guidelines for the listed businesses just stops at reporting of the GHG emissions/measurement methodology, the EU regulations take it a step forward to disclose key performance indicators apart from its materiality.

The ideal path forward for India would be to declare its own taxonomy of economic activities that align itself with the net-zero goals. The green taxonomy and disclosures based on the same by the listed and unlisted universe of businesses and financial institutions, would help regulators propose norms for climate-labelling of retail financial products from banks, insurance companies, NPS providers to intermediaries and the issuers in securities markets.

While such activities enhance the transparency about the businesses and their climate resilience, the retail investors must be convinced of the implications of such business activities and financial products that back them. A mass awareness campaign jointly by the government and the sectoral regulators of banking, securities markets, insurance and pension products will go a long way to help augment ‘green financing’.

As ‘green financing’ picks up, it will drive stakeholders around economic activities that will make us Paris Protocol-compliant and on the ‘net zero’ path moving the responsibility to the investors.

The writers are with National Institute of Securities Markets