Sustainable finance is finding its way back on lenders’ agenda, and a taxonomy will give it a boost, reports Raghu Mohan

Fuel disruptions due to the West Asia conflict and the possibility of an indifferent monsoon in the country have put the spotlight back on financing the transition to a cleaner economy. A formal taxonomy is in the works, but what has gone relatively unnoticed is the shift underway.

“Green finance has moved from the margins to one of our focus areas, across renewable energy, rooftop solar, electric vehicles, green-certified buildings and sustainable water projects,” says Ajay Kumar Srivastava, Managing Director (MD) and Chief Executive Officer (CEO) of Indian Overseas Bank. He points to offerings like IOB Surya, IOB Tejas, as well as partnerships with the Indian Renewable Energy Development Agency and the Indian Green Building Council.

“With the national taxonomy taking shape, we are building readiness in step with it.” IOB measures financed emissions through the Partnership for Carbon Accounting Financials, uses Indian Green Building Council Certification, and embeds climate risk into credit through borrower assessments and physical risk mapping with The Council on Energy, Environment and Water. “So that our book aligns seamlessly once the framework (taxonomy) is notified,” Srivastava adds.

Shachindra Nath, Founder and MD of UGRO Capital, feels the real catalyst will be a domestic pool of concessional capital.

“Government-backed institutions and others should mobilise low-cost climate capital, extend concessional hedging support for foreign borrowings, and provide targeted interest subvention.”

The buzz is that an official taxonomy may be in place by the end of FY27. In the Union Budget FY25, Union Finance Minister Nirmala Sitharaman said:

“We will develop a taxonomy for climate finance for enhancing the availability of capital for climate adaptation and mitigation. This will support achievement of the country’s climate commitments and green transition.”

November 2022 was a turning point in the run-up to this, as the Sovereign Green Bonds framework was finalised. This built on the Reserve Bank of India’s (RBI’s) Survey on Climate Risk and Sustainable Finance in July 2022, which was followed a month later by the Securities and Exchange Board of India’s (SEBI’s) reporting architecture on sustainable finance.

In April 2023, Mint Road had come out with a green deposit framework, but qualified this as an interim measure as:

“The allocation of proceeds raised from green deposits shall be based on the official Indian green taxonomy” when finalised.

Capital concerns

A NITI Aayog estimate puts the investment needs for India’s net-zero transition at $22.7 trillion by 2070, with a financing shortfall of $6.5 trillion.

Net-zero demand by 2050, alone, will exceed $8 trillion, a gap of nearly $2.5 trillion. It is also not that lenders have not contributed their might.

Axis Bank raised $500 million with India’s first internationallylisted certified green bond on the London Stock Exchange in June 2016 — a carve-out within its $5 billion medium-term note programme. In the first fortnight of January 2023, the Export-Import Bank of India raised $1 billion through green bonds priced at 190 basis points over the 10-year US Treasury Bill. The deal — put through by J P Morgan, Bank of America, Barclays, Citigroup, HSBC, Mitsubishi UFJ Financial Group, and Standard Chartered Bank — was the largest such issuance by an Indian entity. Right after came the maiden auction of the twin sovereign green bonds via five- and 10-year papers for a cumulative ~8,000 crore.

What will a taxonomy do? As on date, on the liabilities side, investors and depositors lack visibility into how banks embed climate change and other environmental factors into lending, risk management, and strategy. On the assets front, sectorlevel proxies such as renewables and electric vehicles (adopted unevenly across banks) create definitional inconsistencies, undermine comparability, and open the door to greenwashing. “Until a formal taxonomy is issued, banks should adopt internally consistent green classification frameworks with clear accountability for use-of-proceeds and disclose how they adopt the taxonomy,” says Labanya Prakash Jena, director at the Climate and Sustainability Initiative, a global research organisation dedicated to decarbonising emerging economies. “In the interim, RBI can mandate minimum disclosure standards that allow depositors and investors to assess banks’ genuine climate orientation.”

This mirrors a paper by Saurabh Ghosh, Siddhartha Nath and Abhishek Ranjan of RBI’s Strategic Research Unit, Department of Economic and Policy Research, in the January 2021 Bulletin. It held that “major challenges could be high borrowing costs, false claims of environmental compliance, plurality of green loan definitions, maturity mismatches between long-term green investment and relatively short-term interests of investors.”

Thinking deep

Mint Road issued its first notification on sustainable finance nearly two decades ago in December 2007. It was a 26-page guidance note on climaterelated financing — the first, perhaps, by any central bank in the world. It observed that the banking and financial sector’s immediate environmental and social impacts are relatively low because these are delivered through the activities of other businesses that rely on financial institutions. But “… despite the relatively indirect nature of their environmental and social impacts, banks need to examine the effects of their lending and investment decisions”. And they are to put in place “a suitable and appropriate plan of action towards helping the cause of sustainable development, with the approval of their boards,” keeping in context the Equator Principles.

The role of boards has its complexities. “Boards must push for integrated nature resilient operations, identify weak spots, reskilling needs, and discuss some pertinent questions. Like, what are opportunities available to scale up low-carbon financing?” says Ajay Sagar, former senior staff at the Asian Development Bank (ADB), Philippines and Bank of America, Asia. A lot is at stake. After the West Asia crisis, civil nuclear energy has become a key priority. “A noteworthy step would be to focus on the special skills to structure such nuclear financings for the entire value chain, including accessing green bond markets, and an ability to offer long duration currency swap facilities by RBI currency hedging,” he opines.

Then you have the operational aspects. Green financing requires a blend of credit, technical, and sustainability expertise, which goes beyond traditional underwriting skills. “Larger banks and non-banking financial companies have started investing in dedicated ESG teams and sector specialists, but depth and consistency remain uneven mostly in areas like climate risk assessment, lifecycle impact, and transition pathways,” according to Sankar Chakraborti, MD and CEO of Acuité Ratings & Research. Many institutions are leveraging external frameworks and data partnerships to bridge gaps. “This is such a specialised area that, in the near term, the trend will continue. Eventually, as regulations evolve, internal teams of lenders will need to invest in capacity building.”

There is also the impact of climate change on low-income segments and small businesses. “And this goes beyond the obvious agricultural links that have dominated credit discourse all these years,” notes Sumita Kale, CEO and senior fellow, Indicus Foundation. She bemoans the lack of movement from the policy and regulatory side after the Finance Ministry’s draft framework for ‘India’s Climate Finance Taxonomy’ last year and RBI’s draft ‘Disclosure framework on Climate-related Financial Risks (2024)’. “Without clear policy direction and regulatory incentives, weather-related shocks will continue to deepen financial stress for our most vulnerable households and enterprises.”

It’s time to go green for planet blue in a big way.

Originally published in Business Standard – All editions.