Legal issues in green finance need to be cleared up

The central bank has identified renewable energy, waste management, clean transport, energy efficiency, and afforestation as projects to be funded from green deposits

The green bonds issued by the World Bank in 2008, denominated in Swedish krona (SEK) for a total amount of SEK2.325 billion, in partnership with Scandinavian institutional investors, and having a maturity of six years, is acknowledged as having set the template for sustainable investing globally. The market for such bonds is seen at $914.4 billion by 2030. This is despite the recent hiccup — issuers sold $443.72 billion worth of green bonds in 2022, down from $596.30 billion in 2021, according to data from the Climate Bonds Initiative, a UK-based green-debt tracker.

Awareness of green finance (GF) has gained momentum with the proactive steps taken by both the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (Sebi). In April, the RBI issued its circular on green deposits. Renewable energy, waste management, clean transportation, energy efficiency, and afforestation were identified as projects to be funded from such deposits.

And beginning FY23, Sebi has mandated Business Responsibility and Sustainability Reporting (BRSR) for the top 1,000 listed companies by market capitalisation. The disclosures under this would incentivise GF and help lenders to estimate climate-related exposures. The push projecting ESG (environmental, social, and governance) as intangible, but a serious reputational and optics issue has become a big consideration for India Inc in looking for sustainable GF projects.

Yet, there is no taxonomy in place for GF in India. As RBI Deputy Governor Rajeshwar Rao pointed out in December last year, a GF taxonomy is the need of the hour, as it would enable more precise tracking of financial flows to the sector. This would help design effective policy, regulations and institutional mechanisms directed towards increasing both public and private investments. Rao had also called attention to the need for having in place a robust system of third-party verification and impact assessment of green credentials.

As on date, it is a challenge to recognise projects that qualify as green other than in cases when they are financed through bonds listed on the stock exchanges. There is a need to broad-base projects and clearly define the parameters to quality for GF, even for small businesses which form an essential part of the supply chain integral to the success of a sustainable project. Plus, a level-playing field for categories of players.

Another aspect is: will lenders offer cost benefits in the form of lower interest rates for borrowers? This needs to be cleared up, as it would be difficult for such entities to access finance in an organised and structured way. This, even as there is a lack of awareness on GF among businesses and investors. Hence, meaningful communication is required. Tax incentives for sustainable projects of a particular size utilising GF may be considered by the government to boost the idea.

The danger of green-washing is all too real. Stringent regulations are needed to check this abuse -- checks and balances must be in place before a project is certified for GF with adequate monitoring and audit processes with appropriate regulations, to act as a deterrent to any potential mischief. Lack of clarity on regulations may deter mature players from participating, and this may become counterproductive.

A robust beginning has been made. Regulators are sensitive and proactive on GF, even as international lenders are pushing its availability. Governments, private agencies with the backing of global players, and consultants are providing services for monitoring, rating, and gap-analysis on ESG compliances by business houses. An organised ecosystem is fast rolling out. This may reduce the gap on concerns like assurance, plurality and green-washing. Green buildings, energy-efficient manufacturing plants, water management, waste management and data centres are ready areas for GF to hook into.

In India, unmanned crossings are chaotic. Green finance should not turn out to be one.  

The writer is managing partner, SNG & Partners, Advocates and Solicitors (India)