Green Finance

The term green finance has gained a lot of attention in the past few years with the increased focus on green development. The Rio+20 document clearly states what green economy policies should result in and what they should not. While there is no universal deletion of green finance, it mostly refers to financial investments wing towards sustainable development projects and initiatives that encourage the development of a more sustainable economy (H�hne et al. 2012). Green finance includes different elements like greening the banking system, the bond market and institutional investment. Several working deletions and sets of criteria of green finance have also been developed. Examples include the China�s Green Credit Guidelines, the Climate Bonds Taxonomy of Green Bonds, the International Development Finance Club�s (IDFC) approach to reporting on green investment, the World Bank/International Finance Corporation�s (IFC) Sustainability Framework and the UK Green Investment Bank Policies. An initial review of the current definitions in use reveals sizeable intersections of the various definitions in thematic areas such as clean energy, energy efficiency, green buildings, sustainable transport, water and waste management, as well as areas of controversy such as nuclear and large-scale hydro-energy, biofuels and efficiency gains in conventional power.

Over the past decade there have been advances in mainstreaming of green finance within financial institutions and financial markets. Voluntary standards such as the Equator Principles have enhanced environmental risk management for many financial institutions. The World Bank Group has set up an informal �Sustainable Banking Network� of banking regulators, led by developing countries, to promote sustainable lending practices. In 2015, green bonds issued by governments, banks, corporates and individual projects amounted to US$42 billion. Globally, more than 20 stock exchanges have issued guidelines on environmental disclosure, and many green indices and green ETFs (exchange-traded funds) have been developed. The Financial Stability Board (FSB) has established a climate-related financial disclosures task force that is expected to complete its first stage of the work by end-March 2016. A growing number of institutions, including the Bank of England and Bank of China (Industrial and Commercial Bank of China), have begun to assess the financial impact of climate and environmental policy changes. Germany, the US and the UK have developed interest subsidy and guarantee programmes for green financing, and over a dozen government-backed green investment banks are operating globally. The G-20 has also recently set up a green finance study group (GFSG).

One topical issue in the context of green finance is that of enhancing the ability of the financial system to mobilize private green finance, thereby facilitating the green transformation of the global economy which has been widely discussed in different for a including the G20. However, for developing countries like India, private finance will not readily be forthcoming and public finance both international and domestic needs to be used to leverage private finance. Green development is also important for India though green finance is yet to pick up. Attaining the ambitious solar energy target, development of solar cities, setting up wind power projects, developing smart cities, providing infrastructure which is considered as a green activity and the sanitation drive under the �Clean

India� or �Swachh Bharath Abhiyan� are all activities needing green finance. India has created a corpus called the National Clean Energy Fund (NCEF) in 2010-11 out of the cess on coal produced/imported (�polluter pays� principle) for the purpose of financing and promoting clean energy initiatives and funding research in the area of clean energy. Some of the projects financed by this fund include innovative schemes like a green energy corridor for boosting the transmission sector, the Jawaharlal Nehru National Solar Mission�s (JNNSM) installation of solar photovoltaic (SPV) lights and small capacity lights, installation of SPV water pumping systems, SPV power plants, grid-connected roof top SPV power plants and a pilot project to assess wind power potential.

So far four banks have issued green bonds in India. Proceeds from these bonds are mostly used for funding renewable energy projects such as solar, wind and biomass projects and other infrastructure sectors, with infrastructure and energy efficiency being considered as green in their entirety. The Securities and Exchange Board of India (SEBI) has also recently approved the guidelines for green bonds. While mobilization and effective use of green finance is of primary importance, there are some issues which need to be taken note of.

For a developing country like India, poverty alleviation and development are of vital importance and resources should not be diverted from meeting these development needs. Green finance should not be limited only to investment in renewable energy, as, for a country like India, coal based power accounts for around 60 per cent of installed capacity. Emphasis should be on greening coal technology. In fact, green finance for development and transfer of green technology is important as most green technologies in developed countries are in the private domain and are subject to intellectual property rights (IPR), making them cost prohibitive.

Green bonds are perceived as new and attach higher risk and their tenure is also shorter. There is a need to reduce risks to make them investment grade.

There is also a need for an internationally agreed upon definition of green financing as its absence could lead to over-accounting. While environmental risk assessment is important, banks should not overestimate risks while providing green finance. Green finance should also consider unsustainable patterns of consumption as a parameter in deciding finance, particularly conspicuous consumption and unsustainable lifestyles in developed countries.

Written by princy

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