The pricing of the Centre’s sovereign green bond can act as a benchmark for private sector players’ fund raising through rupee bonds for ESG linkages, said Reserve Bank of India deputy governor M Rajeshwar Rao at the Business Standard BFSI Insight Summit.
Finance minister Nirmala Sitharaman, in her budget speech for 2022-23, had announced that the government will issue green bonds as a part of its market borrowing for the current financial year.
“The proceeds [raised by government via green bonds] would be deployed in public sector projects which will help in reducing the carbon-intensive (sections) of the economy. This by no means is a small step,” Rao said in Mumbai on Thursday.
“The sovereign green bonds will also provide a pricing reference for the private sector entities in India for their rupee-denominated borrowing for ESG linkages,” he said while observing that issuing such instruments would help greater flow of capital into green projects.
Rao said the central bank recognises the need for concerted efforts in this area. It has set up a sustainable finance group within its department of regulation in May 2021 to lead the regulatory initiative in the area of climate risk and sustainable finance in the Indian context.
Sitharaman last month approved the final Sovereign Green Bonds framework to strengthen India’s commitment towards its Nationally Determined Contribution (NDCs) targets, adopted under the Paris Agreement, and help in attracting global and domestic investments in eligible green projects.
Commercial banks and financial institutions should lead the way. “To support this acceleration, a number of structural changes would be needed in the traditional lending approach including evaluation and certification of the green credentials. In order to give focused attention on scaling up green finance, banks and financial institutions would have to invest their human resources and capacity building as well as to integrate environmental and social risk concentration,” he said.
One of the challenges for scaling up green finance is the availability of a robust ecosystem for third-party verification and assessment of green credentials. “This would also address green-washing concerns and ensure unhindered flow of capital to the entities,” he said.
“The challenge regarding the availability of data and disclosures would also need to be addressed quickly. In this context, the disclosure standards prescribed by the Sebi [Securities & Exchange Board of India] for the top 1000 listed entities by market capitalization, is a welcome step,” Rao said.
He said the financial sector has a key role to play as it is the sector which finances business. Banks would have their role cut out in hand holding the businesses and transition finance required for firms as they shape their strategy, he pointed out.
“Indian economy is at a stage where we need to grow rapidly but the challenge before us is to think of ways to incorporate climate risks and related concentration in commercial lending and investment decisions while simultaneously balancing the need for credit expansion, economic growth and social development. Collective engagement will go a long way in addressing the challenges of climate change,” he said.