Banking Article, Banking Finance 2021, Banking Finance May 2021


As the world was witnessing environmental degradation due to rapid industrialization and infrastructure growth, global leaders met on a global platform for evolving innovative ways for environment protection, without compromising on the economy. At this point, Green Finance was brought into existence.

Green Finance is an integration of finance and innovation towards those products that lead to an environmentally sustainable growth. In other words, it combines opportunities for economic growth as well as reaping environmental benefits, simultaneously.

Green Finance had gained popularity after the Paris Climate Agreement, when countries had committed towards fighting climate change but faced a parallel challenge to achieve a sustained economic growth. Green Finance includes various financial products and services (viz. green bonds, green loans, green insurance, etc.) focused towards creating a positive befalling impact on the environment.

According to the United Nations Environment Programme, Green Financing can be promoted inter alia through changes in countries’ regulatory frameworks, harmonizing public financial incentives, increase in investment in clean and green technologies, etc.1

With an aim to reduce the carbon footprint, and keeping in consonance with the Paris Climate Agreement, countries are now developing strategies and policies for encouraging Green Finance. This is being achieved by redirecting capital flows to environmentally responsible projects and technologies.

The World Is Going Green

With increased awareness in relation to environmental protection, banks have now introduced green finance products within their existing product portfolios. These include green home loans2, green construction loans3, green car loans4, green project loans, green securitization products, etc.

Additionally, financial intermediaries, government and central banks of various countries are also playing a pivotal role in promoting green loans by introducing incentive schemes or mandatory regulations. Some such schemes that have been introduced globally are as follows:

  • In April 2019, Doconomy, a Swedish fintech startup had launched a credit card wherein the credit limit was based on the amount spent but instead, on the aggregate of carbon footprint associated with the purchases made using the 5
  • In 2018, the Government of Malaysia launched the “Green Technology Financing Scheme 0” for encouraging the financing towards production of green products. The scheme offers green projects with a 2% per annum subsidy on interest rate for the first 7 years and

60% government guarantee on green component cost.6 As of today, around 52 banks in Malaysia are participating under this scheme.7

  • In April 2014, the Bangladesh Bank had directed all banks and financial institutions to disburse a minimum of 5% of the total loan disbursal towards direct Green 8
  • In 2007, the China Banking Regulatory Commission had issued mandatory “Green Credit Guidelines”. Under the said guidelines, banks in China were mandated to promote green credit as a part of their strategy and business policy. Under these guidelines, the combined green credit loan portfolio of China Development Bank and Industrial and Commercial Bank of China in 2011 was approximately USD 200 9

However, the first global industry-wide practice framework was introduced in 2018 jointly by the Asia Pacific Loan Market Association, the Loan Market Association and the Loan Syndications & Trading Association, in form of “Green Loan Principles”.

The Green Loan Principles: The First Step Towards a Consolidated Framework

The Green Loan Principles (GLP) were introduced to promote the green loan market. The GLP, inter alia provides a non-exhaustive category of projects that can be classified as “Green Projects”.10 Further, the GLP lays down 4 important components of Green Loans:

  • Use of Proceeds: Proceeds of a “Green Loan” shall be utilized towards Green This, along with the environmental benefits of the Green Projects shall be documented.
  • Process for Project Evaluation and Selection: The borrowers shall disclose all relevant information (such as the objectives, strategies and/or environmental risks associated) as regards the environmental sustainability of the project to the
  • Management of Proceeds: The loan proceeds of the Green Loan shall be credited to a dedicated account which can be easily tracked by the Further, the borrowers shall put in place a mechanism to track the proceeds utilized towards the Green Project.
  • Reporting: The borrowers shall maintain relevant information for the Green Project, which shall be shared with all the lenders on an ongoing basis. If required, the borrower shall seek advice from external consultants and obtain certifications from rating 11

The GLP also advises for certain covenants, representations and penalties (in cases of default and “Greenwashing”, i.e. false or misleading claims of the project being a Green Project) to be provided in the Green Loan documentation.

India: Putting Greener Footprints

Though there is no dedicated regulatory framework for Green Finance in India, there are statues and guidelines issued for promoting Green Finance. To name a few, (i) the Companies

Act, 2013 requires companies to be engaged in corporate social responsibility (CSR) activities, which inter alia includes “ensuring environmental sustainability”, (ii) the Securities and Exchange Board of India had also, in 2018, issued guidelines in relation to issuance of green bonds, and (iii) the Reserve Bank of India has notified renewable energy as one of the priority sectors for lending.

In view of the above, several Indian entities such as the Indian Renewable Energy Development Agency, Yes Bank Limited, NTPC Limited, Greenko Group etc. have issued green bonds. Further, Indian banks are also offering green loan products, such as the green home loan scheme by State Bank of India12, solar energy loan scheme by Union Bank of India13 and biogas plant loan scheme by Punjab National Bank.14

In 2012, the BSE SENSEX had also launched BSE-GREENEX, an index of top 25 (previously top 20) companies in terms of greenhouse gas emissions, market cap and liquidity. Further, the Confederation of Indian Industry has also established the Indian Green Building Council (IGBC), which certifies whether construction of building involves green initiatives. Accordingly, green building certifications namely Certified, Silver, Gold and Platinum are provided to all such buildings which meet the criteria laid down by IGBC.

With the above developments, lenders are now putting certain green covenants in their term sheets as well. For instance, lenders are asking commercial real estate borrowers to obtain green building rating from IGBC. For industrial borrowers, lenders are putting covenants as regards pollution control and greenhouse gases emission control.

Green Finance: Present Hurdles

Despite various innovative products being offered in the Green Finance space and the urgent need for same, Green Finance still faces some major challenges.

The biggest such hurdle being lack of a regulatory definition on Green Finance and international standards for determining the same. Due to this, some borrowers often indulge in greenwashing. Save for a few countries, major economies do not have any effective legal framework or initiative to promote and regulate Green Financing.

Recently, the Reserve Bank of India has also recognised that a policy action is needed to boost Green Financing15, and address certain challenges such as greenwashing, non-standard definitions and imbalance between long-term and short-term interests of investors. Further, high cost of funds and lack of technological advancement also acts as a barrier to the promotion of Green Finance.

Lastly, existence of sector specific regulatory barriers, such as procuring licenses and governmental approvals in some jurisdictions also restricts the growth of green projects.

Collaboration: The Key for a Greener Tomorrow

Though, there is a need to give our future generations a developed world to live in, it is also imperative to provide them with a healthy and green environment. Our responsible actions today shall determine the future of our coming generations.

Against the backdrop of the current situation, it is important to cultivate an ecosystem which enables economic growth and environmental protection simultaneously. While Green Financing seems to be the way of putting in place such an ecosystem, collaborative efforts between the public and private sector is the need of the hour!

While GLP can be the cornerstone for having such a debt based Green Finance framework in place, it can be further reassessed keeping in mind the needs of the Indian economy at present.

The ultimate goals and benefits, that can be reaped through Green Financing, will boil down to the unified approach to be adopted by the governments, central banks, financial institutions, private enterprises and public at large.

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