ESG & Sustainability: The next frontier in finance

It is pathbreaking that the regulators are relentlessly coming up with directives on green finance and also the monitoring mechanism
Last Updated : 27 March 2023, 00:10 IST

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India is one of the fastest growing economies and green finance is chasing our country from global development financial institutions (DFIs) as well as initiatives taken by Reserve Bank of India (RBI) and other financial institutions and banks. The global funds by way of equity and debt are available on a long-term basis and at cheap rates, provided the same are being deployed on projects which are environmental, social and governance (ESG) compliant and promote sustainability.

In 2023, RBI has already auctioned green bonds worth Rs 8000 crore and the proceeds are to be utilised for green and sustainable projects including solar energy, hydro power etc, which reduce carbon footprints.

This is a new path with new challenges and will evolve in a phased manner. There are risks and fortunately mitigants.

Self-awareness on good governance and the intangible benefits on reputation and goodwill is a compelling reason for corporate India to become more and more ESG compliant and use green finance for sustainable projects.

The question often asked are whether sustainable projects are really available or being undertaken or its much ado about nothing. Who is auditing and rating such projects? What parameters are available to measure whether the projects meant for green finance are actually sustainable for a few years from now? Or, are we inching towards a new form of scam in the form of greenwashing, where the green finance is diverted for the compelling reasons owed to ESG compliance?

It is pathbreaking that the regulators are relentlessly coming up with directives on green finance and also the monitoring mechanism.

SEBI’s mandate on the application of the business responsibility and sustainability report (BRSR) to the 1,000 largest listed companies (by market capitalisation) on a mandatory basis for fiscal year 2022-23 and RBI’s discussion paper on Climate Risk and Sustainability Finance Push and Ministry of Corporate Affairs’ initiative on ESG are clear indications that this concept is there to stay.

Non-convertible securities regulations as issued by SEBI, on February 3, 2023 define “green debt security” as a debt security issued for raising funds that are to be utilised for project(s) and/or asset(s) including renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology, clean transportation, sustainable water management, climate change adaptation, green buildings etc which demonstrates the ever growing demand for green finance.

To check any possible misuse of green finance is critical. Checks and balances are required at an early stage to ensure compliance and avoid hoodwinking by any unscrupulous group. It may be relevant to mention that Taxonomy Regulation lays down a classification system to enable businesses to identify whether or not a given economic activity is considered "environmentally sustainable". Constant review and appropriate policies have to be introduced by market regulators, ensuring that the entire supply chain monitoring happens so that the green initiative is not restricted only to large players. They have to come up with such regulations to ensure that environmental sustainability and / or environmental governance are duly complied.

India is one of the fastest developing economies and is steadily climbing up as the destination for large scale economic activities including manufacturing. It is also a fact that carbon emission levels in India are third highest. The Paris Climate Agreement is a compelling reason to have the right policies in place to control the carbon levels and create an eco-system to ensure that green finance is available for all relevant sectors and not only solar.

On March 8, 2023, RBI Governor, Shaktikanta Das said that the central bank will "soon" issue guidelines for regulated entities to increase green lending, accept green deposits and mitigate risks related to climate change. While green loans can be ESG-linked, they are issued solely to finance environmentally sustainable projects. These guidelines, marking RBI's first step towards implementing ESG norms, will help India meet its target of reducing its carbon emissions to net zero by 2070.

Green finance is here to stay.

(The writer is Managing Partner, SNG & Partners, Advocates and Solicitors)

Published 26 March 2023, 16:54 IST

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