By Anmol Anand
Since our childhood we are told by our parents to spend our money wisely, to develop a habit to save money, after all, ‘Money doesn’t grow on trees.’ We are well aware of this fact, but what we’re experiencing in the current times is not a money crisis, but a Climate Crisis. So, is there a way to grow trees on money? Let’s find out!
Finance impacts the natural environment directly and indirectly. The environment also directly and indirectly impacts finance and the performance of investments. We have been hearing a lot about Green Bonds and Climate Insurances and many such instruments taking the limelight in recent times but first we need to address this holistically.
Green Finance or Eco-Investments is a form of investing into social responsibility projects and related companies. It is a well structured investment activity to generate an environment sensitive outcome that benefits the masses as whole. It includes an array of loans, debt mechanisms and investments that are used to push the development of green projects or minimise the impact on the climate of more regular projects. Or a combination of both.
The real question is still Why? What value does this add and why is it being fancied by big multinational corporations to boost CSR?
Well we have a ton of reasons why green financing has become more of a need, some of which are:
Funding Sustainable Developement
Development by sustainable means and resources has been a long sought goal of countries and their unions. And what more support does it requires after UN promoting it’s 17 SDGs
Boosting Energy Transitions
More and more electric vehicles coming up, increasing utilisation of non-conventional sources of energy etc. are some examples why sustainable project financing is important. Green Investments fuel the increment of sources of such activities.
Well, we’ve got a hint of why Ecological Investing is gaining popularity. Let’s now have a look at routes by which such nature sensitive projects and activities are funded.
There are instruments of Green Financing such as
We’ve all heard about Bonds and other debt instruments but green bonds are instruments specifically designed to support climate related and environment projects. These instruments come with various tax incentives to attract a financially stronger chunk of individuals. Large economic institutions such as ADB, World Bank have been issuing these bonds in hefty amounts lately with the World Bank being the biggest issuer till date, having issued green bonds worth $14 Billion.
Climate Risk Insurance:
Climate Change has been in the news for long now and why not should it be? It has become a major structural and financial risk to the corporate sector and must be treated as such. But with threat, this has also been exploited as an opportunity by insurance companies. Climate RIsk Insurance is a financial instrument designed to mitigate the risk caused by climate change and natural calamities. It is being exponentially opted for by local governments and large property holders especially in more vulnerable areas. Now, more and more companies and banks too are stepping into this domain in hopes of profits.
There has been huge scrutiny towards carbon usage and companies along with governments are trying innovative methods to reduce their carbon footprints. One way it is being done is the creation and management of Carbon Funds. These offset schemes allow individuals and companies to invest into environmental projects with an aim to balance out their own Carbon Footprints. Sounds cool, right? The accumulated funds might be used to innovate non-conventional energy sources and develop carbon waste management methods.
Apart from these, there are many more instruments by which climate prevention projects are increasingly funded. Now we get someway near to our answer that ‘Can Trees grow on Money?’ Well, surely not, but the natural resources which we have exploited heavily to develop monetary resources demand something back in return which requires funds.
Everything we discussed above is quite the haute thing in terms of Green Finance. There is a chance that we haven’t heard of any such activities going on in India. Let’s see what is India’s scenario in the field of Eco-Investments.
India had started emphasising on Green Finance via a Public Notification by RBI in 2007. In the notification specifying Corporate Social Responsibility and Non-Financial Reporting by Banks, it mentioned the importance of sustainable finance and climate action.The Reserve Bank has also been taking proactive policy measures to promote and support green finance initiatives. It has included the small renewable energy sector under its Priority Sector Lending (PSL) scheme in 2015. Under this scheme, firms in the renewable energy sector are eligible for loans upto 30 crore while the households are eligible for loans upto 10 lakh for investing into renewable energy
The Government has also been sensitising investors, companies and the general public towards the projects led towards climate action. So, India in itself has been constantly building its infrastructure for Investment into Environment sensitive and Green Energy projects.
Okay, so we’ve come this far discussing all the good stuff about climate, environment and how finance as a domain is helping it. But if it was all a rosy path to walk on then we wouldn’t have been so keen putting our heads to it. There are several challenges which need to be addressed before we actually begin reaping the benefits of such initiatives.
Absence of International Standards:
After coming a long way, the top governance in G-20 has still not been able to find and apply a generic standard to measure the requirement and analyse it for easy financing. The mismatch between individual efforts often causes the problem of overlapping initiatives and poor mishandeling on the union side.
Inefficient tools to measure returns:
There is a need to measure the social return on the cumulative investments towards various projects. The Social return every financial instrument i.e. Green Bond, Carbon fund etc. fetches still contain some ambiguity.
Poorly managed Projects:
The discrepancy in the projects and their capital creates major doubts in the conscience of Investors. As the need for investments rise, the demand for efficient outlays inclined towards environment conservation also increases.
So, now we figured out newer advancements in the environment sector require financial support and how the world at present is perceiving it. But the question still remains that to what extent it will be successful and how would the benefits be experienced in the future.
Well let us leave that question for now and focus on absorbing such interesting ideas by reading more articles on FIC