Green finance market size could be $5.6 trn by 2047

India’s commitment to “net zero” by 2070 is undoubtedly an ambitious goal, but we have achieved lofty goals in the past — be it the green revolution, polio eradication, or managing the fallouts of the pandemic. The challenge of achieving net zero, is not just technological, wherein companies need advanced solutions to overcome the limitations of unclean production processes. It’s more of a financial challenge.

Financing India’s growth over the next five decades will require innovative financing solutions. Ensuring not just growth but also transforming the economy away from conventional fuel and towards recycling will require the central and state governments, banks, investors, and regulators to welcome green finance.

An instrument that has already caught everyone’s attention is green bonds. Since the Securities and Exchange Board of India’s guidelines of 2017, the issuance of green bonds has witnessed growth on the back of support from domestic and global investors, as well as issuers such as the National Thermal Power Corporation, Indian Renewable Energy Development Agency, and ReNew to name a few.

Over the past decade, green financing has witnessed remarkable growth reflecting a worldwide pivot towards sustainability. According to the Global Sustainable Investment Alliance’s biennial report, sustainable investment assets grew to a staggering $35.3 trillion in 2020, a rise of 36 per cent of total assets under management globally. A standout segment within this is the green bond market. According to data from the Climate Bonds Initiative, such issuance surged to over $270 billion in 2020, from a mere $11 billion in 2013.

However, given the depth of the overall domestic bond market, India cannot only rely on green bonds to make this transition. Millions of small and medium enterprises and thousands of new projects will need funding. This is where adopting principles of green financing by banks and non-banking financial companies shall be the key; the entire financial system’s balance sheet has to become green by 2070.

A piecemeal approach to greening will pose new challenges. Creating means to raise reasonably priced capital for individual projects is a good start. But the not-so-green part of the producers’ business will also keep growing unless we have a more holistic view of the issue.

Banks and funds need to, on a war footing, develop new taxonomies, and adopt new risk measurement tools. Many funds today sell ESG (environmental, social, and corporate governance)-themed instruments, as part of their offerings. However, it’s not just about ESG for ESG funds. It’s going to be ESG for everything, by 2070.

Let’s look at what this indicates for the size of green financing needs.

By 2047, India will reach halfway its 2070 goal. Assuming this translates to the greening of Indian banks’ assets to the extent of 50 per cent. After accounting for the current size of assets on the books of Indian lenders, India’s GDP growth, credit off-take, and exchange rate movements, the green finance market could reach $5.6 trillion — approximately three times the current size of the lenders’ books!

Such a large volume of exposure will require specialist skills, strong assessment capabilities, adequate audit and monitoring mechanisms, and high-quality data on green projects. In the face of this impending disruption, green-washing will pose a huge challenge. Banks and funds will need good science to review claims and strong monitoring agencies to assure data quality and use of funds.

India’s commitment to the Paris Accord is not just a survival goal. It’s India’s opportunity to catapult itself among the “Great Powers”. This will result in the development of thousands of new technological processes and intellectual properties -- almost equivalent to what was observed in the post-war United States. The journey is challenging, but with unwavering resolve, India can craft a sustainable legacy for generations to come.

The writer MD & CEO, Acuité Ratings & Research