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In recent years, the focus on sustainability has grown significantly across multiple fields, including economic policy, corporate strategy, and individual decision-making. Green finance, a key driver of sustainability, has emerged as a powerful tool, linking financial mechanisms with environmental objectives. As India faces pressing environmental challenges, rapid urban growth and a strong desire for economic advancement, the demand for sustainable solutions continues to rise. Green finance plays a critical role in India’s transition toward a low-carbon economy, the expansion of renewable energy and overall environmental stewardship.
What is Green Finance?
Green finance encompasses financial products and services designed to promote environmental sustainability. It covers a wide range of activities, including financing renewable energy projects, improving energy efficiency, supporting sustainable agriculture, minimizing pollution, managing water resources, conserving biodiversity, and contributing to climate adaptation and mitigation initiatives.
Below are the categories that Green Finance can be classified into:
Green bonds: Debt securities that are specifically focused on funding environmentally friendly projects.
Green loans: Loans that are meant for sustainable, environmentally friendly purposes, such as reducing CO2 emissions, or that promote a positive environmental impact.
Green insurance: Insurance products that are mainly designed to mitigate environmental risks and ensure promotion of sustainable practices.
Carbon markets and credits: Financial markets that trade carbon credits, allowing companies to offset their emissions.
Sustainable Investment Funds: Investment vehicles that integrate Environmental, Social and Governance (ESG) criteria into their decision-making process.
Emergence of Green Finance in India
India has placed increasing emphasis on sustainability, particularly following its global commitments such as the Paris Agreement. Under the Paris Agreement, India has pledged to lower its carbon intensity by 33-35% from 2005 levels by 2030. Additionally, the country aims to generate 50% of its electricity from renewable energy sources by 2030, alongside other ambitious goals related to green energy production, carbon reduction and sustainable agriculture. It is estimated that to meet India’s Nationally Determined Contributions (NDCs) under the Paris Agreement, the nation will require US$ 2.5 trillion (around Rs. 162.5 lakh crore) between 2015 and 2030, or US$ 170 billion (approximately Rs. 11 lakh crore) annually.
Given the scale of these goals, financing has been a critical concern. Traditional sources of capital, with their focus on short-term profitability, have often been inadequate in supporting the massive investments required for green initiatives. This gap has given rise to green finance, which offers long-term, patient capital aligned with environmental objectives.
Green bond issuances
Source: The Journal of Indian Institute of Banking & Finance
Green bond issuances in India have been on an upward trend in the past decade. Issuances have increased from US$ 1.2 billion (Rs. 1,000 crore) in 2013 to US$ 21.0 billion (around Rs 1.7 lakh crore) in 2023. These issuances have been supported by favourable government policies and the emphasis on moving to a sustainable economy.
Source: SEBI, Data is as on April 30, 2024
Drivers of Green Finance in India
The growth of green finance in India has been boosted by several factors:
Policy interventions: The Indian government has introduced key initiatives, such as the National Action Plan on Climate Change (NAPCC), the Renewable Purchase Obligation (RPO) and the Smart Cities Mission, to encourage significant investments in sustainability. By February 2024, the total investments earmarked for the Smart Cities Mission amounted to US$ 86.43 billion (nearly Rs. 7,20,000 crore). Of this, 7,742 projects worth US$ 21.80 billion (about Rs. 1,81,561 crore) have been put out to tender. Work orders have been issued for 2,740 projects valued at US$ 10.68 billion (around Rs. 89,000 crore), while 5,002 projects, totalling US$ 11.11 billion (approximately Rs. 92,561 crore) have already been completed. These efforts have attracted interest from both domestic and international investors in green initiatives.
International funding: India has attracted significant funding from global institutions such as the World Bank, Green Climate Fund and Asian Development Bank (ADB), which have provided financial assistance for renewable energy, climate resilience and other sustainable projects.
Corporate and institutional initiatives: Indian companies, especially in sectors such as renewable energy, transportation and infrastructure, have increasingly turned to green bonds and sustainable investments to raise capital for environmentally friendly projects.
Growing public awareness: The rise of environmental consciousness among Indian consumers and investors has led to greater demand for financial products that align with sustainability principles.
Impact of Green Finance
Green Finance has a multi-dimensional impact on India’s sustainable development. These impacts are in several areas highlighted below:
Growth of renewable energy: The renewable energy sector has been one of the most visibly impacted sectors due to the rise of Green Finance. Wind, solar and hydropower projects have all benefitted largely due to Green Finance. India currently stands fourth in terms of installed renewable energy capacity. As per the Central Electricity Authority (CEA), India’s installed renewable energy capacity has grown by 396% since 2016, reaching 201.45 GW as of October 10, 2024, and making up 46.3% of the country’s total installed power generation capacity. At COP26, India set a bold goal of achieving 500 GW of non-fossil fuel-based energy by 2030.
Climate resilience and adaptation: Green Finance has also contributed to enhancing India’s climate resilience. Investments in sustainable agriculture, water management and climate-resilient infrastructure have helped communities adapt to changing climatic conditions. For instance, financing for watershed management projects has improved water security in drought-prone areas, while investments in climate-smart agriculture have increased crop productivity and resilience to extreme weather events.
Reduction in carbon emissions: Green Finance has been instrumental in reducing India’s carbon footprint. The shift to renewable energy, along with investments in energy efficiency and pollution control, has helped lower greenhouse gas emissions. India’s carbon intensity has declined steadily, bringing the country closer to its Paris Agreement targets. Between 2005 and 2019, India’s GDP expanded at a compound annual growth rate of 7%, while its emissions increased by just 4% per year, reflecting a 33% reduction in the carbon intensity of its GDP.
Biodiversity and ecosystem conservation: Green finance has played a role in conserving India’s rich biodiversity through funding tools like conservation bonds and sustainable forestry funds. This financial assistance has supported protected areas, wildlife reserves, and sustainable land use practices, helping to secure ecosystems that are vital for environmental health and economic resilience.
Sustainable Urbanisation: India’s Smart Cities Mission, backed by green finance, has advanced sustainable urban growth by incorporating renewable energy, waste management, and eco-friendly transportation into urban planning. This funding has enabled cities to adopt green technologies, cut pollution, and enhance residents’ quality of life. By September 2024, over 8,000 multi-sector projects are underway in 100 cities, with a total investment of US$ 19.06 billion (roughly Rs. 1.6 lakh crore). Over 90% of these projects—7,244 valued at US$ 17.31 billion (Rs. 1,45,312 crore)—have been successfully completed under the Smart Cities Mission.
Conclusion
Green Finance today has become not just a financial innovation, it is shaping up to be a necessity for India’s sustainable development. As the country progresses to meet its climate goals while ensuring economic growth, we believe Green Finance will play a major role. By investing in renewable energy, climate resilience, sustainable urbanisation and biodiversity conservation, India can achieve a green and prosperous future. The road ahead for Green Finance in India is filled with opportunities. As awareness grows, regulatory frameworks will mature, and global investors will show increasing interest in sustainable projects. Moreover, Green Finance will continue to accelerate India’s transition to a more sustainable, low-carbon economy.
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