4. Green Finance
"For the banking sector, green finance is defined as financial products and services,
under the consideration of environmental factors throughout the lending decision
making, ex-post monitoring and risk management processes, provided to promote
environmentally responsible investments and stimulate low-carbon technologies,
projects, industries and businesses."
-Pricewaterhouse Coopers Consultants (PWC), 2013
"At its simplest, green finance is any structured financial activity – a product or service –
that’s been created to ensure a better environmental outcome. It includes an array of
loans, debt mechanisms and investments that are used to encourage the development
of green projects or minimize the impact on the climate of more regular projects. Or a
combination of both."
-World Economic Forum, Green Horizon Summit: The Pivotal Role of Finance
5.
6. Government Policies and Green Finance
→ Public policies have a significant
influence on how markets develop.
Policy actors can use a range of
powerful interventions to shape
markets around key policy agendas.
→ Policy agendas that are focused on
sustainable finance are likely to be
geographically contingent based
upon the political, economic, and
cultural traditions of a given country
or region.
Area
Market-Policy
Traditions
Sustainable Finance
Implications
Europe
Social Economy
delivered by cooperative
and mutual
organizations in the EU
Complement to both the
social sector and
government
United States
Individualistic and Free
Market cultural tradition
New opportunity to
make superior financial
returns on capital
invested
7. Investors and Green Finance
→ The race to net zero and decarbonization are now central to investors’ investment decision-making.
This will likely require significant scenario analysis capability for both corporates and investors.
→ Investors see a significant opportunity from efforts by national governments to drive a green recovery from
the COVID-19 pandemic, but there are some concerns about a market bubble as demand outstrips the
supply of opportunities in innovative new renewables solutions.
→ However, there are two issues that could dampen the threat of a market bubble: first, the sheer volume of
finance required to achieve renewables goals and the investment flow funding gap; second, the
significant amount of funding likely required to “green the brown” by decarbonizing many industry sectors.
8. Types of Bonds
Green
Bonds
Devoted to financing new and existing projects or activities
with positive environmental impacts.
renewable energy, energy efficiency, clean transportation,
green buildings, wastewater management and climate
change adaption
Social
Bonds
Proceeds must finance or refinance social projects or
activities that achieve positive social outcomes and/or
address a social issue.
food security and sustainable food systems, socioeconomic
advancement, affordable housing, access to essential
services, and affordable basic infrastructure
Climate
Bonds
Fixed-income financial instruments linked to climate change
solutions.
Climate change mitigation and adaptation solutions
9. Sustainability Linked Instruments
Sustainability
Linked
Bonds
Sustainability
Linked Loans
Differentiating Property: from previous bond and loan innovations is that the margin (interest
payable) is linked to the borrower’s performance against pre-agreed sustainability performance
targets (SPTs). Unlike green bonds, where proceeds cannot be used for general corporate
purposes, these instruments enable organisations to transition towards sustainability and move
upwards on the ESG maturity curve, without being tied down to use the proceeds in a particular
way.
10. Understanding ESG Bonds , Score Cards and Loans
→ An ESG bond or a Green bond is a promissory note, a
debt security and contract issued by an investment fund
that invests in companies with high environmental, social
and governance standards.
→ Also known as socially responsible or environmentally
friendly investments – as the company has to use the
investor's money only for environmentally conscious and
responsible investments.
→ Globally, ESG bond issuance in 2020 was over $500
billion. This went up to over $900 billion in 2021. This
year, Bank of America anticipates ESG bond issuances
in the $1.2-1.4 trillion range. In India, ESG issuance
were around $10 billion in 2021
→ ESG Score cards are a tool for investors to
understand how much of the money was used for green
and clean projects and higher the rating, higher are the
11.
12. Interlinking Green Finance, Cryptocurrency and Blockchain
The Bitcoin and other
cryptocurrencies have been
dominating the FinTech
markets a lot through multiple
avenues.
Cryptocurrencies are known to
be extremely energy intensive
and carbon consuming as
well, but eco-
friendly cryptocurrencies as
well -
1. Ripple – Crypto + Digital
Payment Gateway, private
blockchain, no mining, proof of
stake, 0.0079 kW/hr v/s
Bitcoin's 707 kW/hr
2. Stellar Lumens (PayPal
alternative, Federated
Byzantine Agreement – energy
efficient.
3. Cardano – 0.01% of energy
used of what Bitcoin uses –
innovation, globalisation and
sustainability – 6 GWh
annually v/s BT's 110 TWh
4. Chia – farming instead of
mining – proof of space and
time instead of computers –
empty hard-disks
5. Nano – no mining, minting,
printing – light-weight proof of
work model – delegated proof-
of-stake – DAG (Directed
Acyclic Graph Tech instead of
blockchain, scalability) -
0.000112 KWh per transaction
13. Exploring the role of FinTech in Green Finance
→ As blockchain establishes direct contact between the two parties, it is easier to deploy blockchain networks in the
energy sector.
→ It is expected to lead to much more direct relationships between energy producers and consumers, and to
strengthen the market participation opportunities for small energy providers and prosumers.
→ In a decentralised energy system, blockchain could enable energy supply contracts to be made directly between
energy producers and energy consumers, and for them to be carried out automatically.
→ Peer-to-Peer trading can be carried out with prosumer-encouraged electricity and energy trade in multiple cycles,
Carbon credits can also be exchanged via blockchain technologies
→ 'Enerchain' is at the proof-of-concept stage and is designed to determine whether a decentralized blockchain-based
model can support the trading volumes and transaction speeds required for trade execution in the gas and electricity
markets.
→ Subnational Pooled Financing Mechanisms (SPFMs) as means of raising sustainability-oriented capital from
financial markets. An SPFM aggregates the financial needs of members into a pooled financing agency (PFA),
which then issues debt and distributes the proceeds from the bond offering to its members.
14. Green Finance for Developing Countries
“The key driver for sustainable
finance in our country is financial
inclusion – making sure that the
financial system serves the
population and helps to
overcome poverty and economic
exclusion.”
15.
16.
17. Green Financing in an Indian Scenario
→ For the net-zero transition, an expected $10 trillion are needed as investments that would help decarbonize India’s power,
industrial, and transport sectors. The CEEW also estimated that an investment shortfall of $3.5 trillion could happen.
→ the financial services industry would account for a massive 72% of the total potential financial impact of the change.
→ India acknowledged the importance of green financing in 2007 and the Reserve Bank of India devised policies to encourage
banks to align with sustainability goals.
→ In 2015, the central bank included small renewable energy projects under the Priority Sector Lending scheme. In
response, Indian banks devised internal policies to reduce their lending to carbon intensive sectors and adopt a green finance
approach to credit.
→ This has also led to some carbon-intensive sectors rethinking their business models and turning to green production methods.
→ According to data published by the Reserve Bank of India, aggregate outstanding bank credit to the non-conventional energy
sector was around 365.43 billion rupees ($4.8 billion approximately), which was 7.9% of the outstanding bank credit to the power
generation sector as of March 2020.
→ Banks have also been issuing green bonds with the objective of pushing work in economically sustainable projects. The value of
these bonds, though, are small when compared with the total size of bond issuance in India. The country has issued green
bonds worth around $8 billion since January 2018, or 0.7%, of total bonds.
18. Challenges and Way forward
→ Keeping borrowing costs low and verifying sustainability claims would be a major challenge for banks in their journey to
green financing.
→ Banks’ ability to work with global financial institutions to provide the capital and structures, innovate new financing
models relevant and specific to Indian challenges and harness the use of technology to accelerate the sustainability
process.
→ To enable banks to operate and develop this sustainable ecosystem, the policy framework is of paramount importance.
→ Fiscal measures such as a supportive taxation policy for green finance would help bring transaction costs down and
promote better lending.
→ India also needs green infrastructure investment trusts to facilitate deeper green bond markets, and green finance
instrument innovation.
→ The collective urge to make a sustainable change that will make a real difference.
→ All sectors are interdependent and making a holistic difference should be worked upon.
→ Greater public awareness, information sharing, and constant research and development should help bring about the
