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Neha Kumar talks about Green Finance and Sustainable Business in India

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Neha Kumar is an expert in the area of sustainable business and responsible finance. For the last 14 years, she has worked on public policy and industry action on sustainability in India. She is currently the India Programme Manager at Climate Bonds Initiative.

In this Q&A with IRBF, Neha gives you an insider’s perspective on how India Inc is tackling climate action. She also throws light on the exponential growth of climate bonds in India.

Q: India has signed the historic Paris Climate Change Agreement in 2016. What is the role of the Indian private sector in fulfilling India’s commitment to this agreement?

We have to acknowledge and recognise that there is quite some action happening related to attaining climate change targets. How much of it is disclosed and at what level of granularity is another matter.

There are regulatory requirements like the Business Responsibility Reports (BRRs) by SEBI for the top 500 companies. This is essentially the mandatory ESG disclosure that India has put in place. Specific climate related risk information or climate action targets do not feature as detailed questions in this format.

A few companies do disclose this information as the format allows descriptive answers too.

It is time that an updated BRR 2.0 was brought out by the SEBI. In fact, it is ready. The updated National Voluntary Guidelines for Social, Environmental and Economic Responsibilities of Business (NVGs) on which BRR is based are ready and have been put for consideration in front of the Ministry of Corporate Affairs by the Indian Institute of Corporate Affairs. We look forward to hearing more on that soon.

It will be good to have NVG and BRR 2.0 out soon especially in the light of Paris and SDG targets and concomitant action by private sector in fulfilling these.

Companies are also reporting on voluntary instruments like the Carbon Disclosure Project and the GRI. And every year we are seeing an improvement in the number of businesses taking action on climate.

Financial institutions are coming up as an actively engaged category. It might be that they understand ESG risks better on account of possibility of loan defaults by their borrowers. That said, there is still some distance to travel in that direction.

In India, regulation has generally been able to drive action forward, so if the Indian Banks’ Association’s National Voluntary Guidelines for Responsible Financing get a regulatory nudge, you’d see much more action by financial institutions on how ESG & climate risks are being understood and incorporated in operations, lending as well as investment by them. This will be another very important lever to drive action on climate and SDGs.

A GIZ-PWC study done earlier this year mapped 19 financial institutions that get covered under BRR to the IBA guidelines’ requirements. And this is what we found – ESG linked investment by FIs is not mentioned in BRRs.

Financial institutions that are mandatorily reporting on BRR could give details on external credit lines but these are largely underreported. When asked about climate change mitigation and adaptation measures, a majority of institutions provided incomplete information. The ones reporting under GRI hesitate to report comprehensively under BRR. So, it’s clear that companies tend to report only the minimum unless asked.

Q: Why has acting on climate change not been a part of the sustainability agenda of Indian companies?

It’s not like climate change wasn’t a part of the agenda before. But I think the Paris Accord has made it more urgent and apparent. It is a more political issue now as well. Countries like ours have started articulating climate action as part of national interest. And, that gets it far more currency, as it should.

Interestingly, what has also happened is that sustainability and climate change seemed to have acquired their own constituencies and we see that sometimes these work in parallel, and lack integrated thinking.

Companies usually follow three types of actions or approaches, broadly classified into three types of targets – immediate, mid-term (between 2020-2035) and long term.

Companies are looking at setting and meeting targets which is a positive trend. A part of this trend has to do with the investor eye on climate change. Especially, that of international investors.

That said, still a lot of action remains limited to immediate targets like energy efficiency measures and reducing GHG emissions in own operations. It doesn’t necessarily cover value chains and climate proofing future operations even though it makes good economic sense. But businesses are not yet in tune with taking a long term comprehensive assessment of the future.

Q: What can Indian companies do more or do differently on sustainability and climate change?

I think leaders in India Inc are in a position to demonstrate their sustainable models, which go beyond what disclosure frameworks such as BRR currently require them to report on.

I think a large percentage of the industry understands the real risk to their business if they will not account for various environmental and social aspects related to their work. But a large number of them don’t integrate sustainability into their business growth model. They still don’t look at it as an opportunity to grow their business.

The moment you flip the perspective from risk to opportunity, the Board looks at it as a far more strategic issue, and not merely a risk to be managed.

I think small scale industry adopts to change faster simply because they can test innovations in the market faster. But they need much better conditions of financing this change.

Q: Where would you place climate change and green finance in the context of the NVGs?

As far as green finance is concerned, it is an example of opportunity. If lending and investment gets linked to climate or sustainable development, it creates an added pull factor in the market.

Responsible financial initiations look for more responsible businesses to invest in and businesses look for resources. This awareness among domestic investors and lenders is however limited. The investors in Europe, US and Japan, for example, are looking for funding opportunities, especially in the developing world and emerging economies.

Now NVGs, even though applicable to all businesses, including financial institutions, are still broad. They are a good starting point, and should serve as the first ESG screen for investors.

NVGs 2.0, as I mentioned, integrates better process and performance indicators in its disclosure format – akin to BRR 2.0. So I must repeat myself and say that there is need for quick action and adoption of the revised framework.

Green finance and investment finds a clear mention, in fact, it is a principle by itself in the IBA’s Guidelines on responsible financing. Those guidelines in fact urge financial institutions to start diversifying their portfolio towards mitigation and adaptation linked investments as well as broader environmentally sound projects.

So the instruments exist. Business case exists too but is understood or implemented by a small number of organisations. Sector level approaches can help. Awareness building, regulatory nudge and policy push all have to happen in tandem to accelerate action on climate change.

Green bonds as an instrument of green finance are catching up fast, I could say, they are leading the green finance space from the front. Indian businesses and financial institutions have raised money from offshore capital markets to exclusively fund green infrastructure.

Examples now range from renewable energy to sustainable transport and the potential is enormous. Think sustainable agriculture, urbanisation, water infrastructure, energy access, forest, marine, biodiversity finance.

From its maiden green issuance in 2015, India has gone up to being in the top 10 as of date with over 15 issuances in this short period of time. That said, a huge scale of green financing requires to be achieved if India has to match its Paris and sustainable development targets.

Imagine a USD 1.5 trillion in the next ten years challenge and opportunity. It requires massive shoring up of private capital and leveraging of public finance. Costs of not being able to finance this transition are multiple times higher than capital mobilised and allocated effectively now.

Countries like France, Poland and Fiji are issuing sovereign green bonds. Green bonds are happening irrespective of the NVGs but investors will look at companies which have sound ESG. Having a good sustainability performance helps. NVGS help you do that systematically.

Q: How would you explain to a layperson what a green bond is?

A green bond is a regular bond whose proceeds fund projects with tangible environmental benefits. The label green doesn’t change the risk profile of the bond which is essentially a function of the issuer’s underlying credit quality. Financial institutions, public and private companies, municipalities, governments can all raise money through green bonds.

The definitional elements of what falls under green has been set by SEBI in India quite in line with the international norms and frameworks like the Green Bonds Principles. Issuers of green bonds have to disclose to SEBI the use of the proceeds. Besides, it is left to issuers to go for certification like that provided by Climate Bonds Initiative, which helps attract international investors.

In India, we also a have a Green Bonds Council hosted by FICCI which brings together market players and works towards understanding market and policy barriers and enablers. It advocates measures that can build sector and inter-sector approaches to scale up green bonds market in India given huge financing needs for a climate resilient and stable economy. Climate Bonds Initiative is a founding partner.

Q: What is the status of climate bonds in India?

The growth of climate bonds in India is phenomenal. The pace at which it is happening is also promising. In the last quarter, between June 2017 to Sept 2017, India was among the top five issuer of green bonds in the world.

In future, we will see the growth of climate bonds in sectors such as sustainable transport, electric vehicles and sustainable urban development.

Right now, big financial institutions and large companies issue green bonds. The international investors are very keen to lap this up and they are looking for credible and high quality projects. Currently, the bonds focus on climate change mitigation but going forward, both the government and private sector will focus on climate adaptation.

Learn more about Climate Bonds Initiative here. You can also follow Neha Kumar on Twitter. If you’re interested in investment, read this article Sustainable and Responsible Investment in India – A New Trend.