Policy Rethink Needed to Promote Green Finance Development in India

India needs a policy framework that addresses existing frictions at both the national and state levels, says a new paper from the RBI.

Green finance is fast emerging as a priority for public policy in India, but several challenges still exist that hinder its development, according to a new paper published by the RBI (Reserve Bank of India).

India began emphasising green finance as early as 2007, with the RBI’s issuance of a notification on the role of banks in corporate social responsibility, sustainable development and nonfinancial reporting.

In 2012, SEBI (Security and Exchange Board of India) made it mandatory for the top 100 listed entities at the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) to publish annual business responsibility reports, a requirement that has since been further refined.

In May 2017, SEBI also issued guidelines for green bond issuance. While the RBI has sought to encourage the development of India’s green bond markets, the paper highlights that there are still high costs associated with green bonds issuance in the country, on account of asymmetric information, higher risk perceptions and governance issues.

The paper also points to greenwashing, a plurality of definitions, and maturity mismatches –between the long-term nature of green investment and the short-term interests of investors – as some of the key challenges hindering the development of green finance in India.

It suggests that the development of a better information management system may help to reduce the maturity mismatches, lower borrowing costs and improve resource allocation in the green finance segment. In addition, India needs a national measurement, reporting and verification platform for tracking climate finance, it says.

“Given the large size of domestic market and much smaller penetration of green instruments so far, there remain vast opportunities to be tapped,” the paper says, also highlighting the need for increased coordination between investment and environmental policies and an “implementable policy framework” that addresses existing frictions at both the national and state levels.

Such a policy framework should be aimed at deepening the corporate bond market, standardising green investment terminology, establishing consistent corporate reporting, and removing information asymmetry between investors and recipients, the paper says.

“A reduction in the asymmetric information regarding green projects through better information management systems and increased coordination amongst stakeholders could pave the way towards sustainable long term economic growth.”

While the immediate policy challenge in India is to kick-start the economy, the pandemic has offered an opportunity for stakeholders to rethink the policy framework and to consider whether existing strategies promote a more environmentally sustainable approach in the long run.

The full paper is available here.

The paper was prepared by Saurabh Ghosh, Siddhartha Nath and Abhishek Ranjan at the Strategic Research Unit of the Department of Economic and Policy Research. The views expressed are those of the authors and do not necessarily represent the views of the RBI.

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