As our planet faces major environmental challenges from climate change to depleting natural resources, the urgency to address these issues by transitioning to a green economy holds top priority. This approach would encompass sustainable solutions and eco-friendly practices in various sectors such as agriculture, cities, energy, waste, transport, tourism and many more.
According to the UN Environmental Program (UNEP), a green economy is a low-carbon, resource-efficient, and socially inclusive economy. Critically, growth in employment, and income is driven by public and private investment into economic activities, infrastructure, and assets that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services. This balance is critical for securing natural resources, while ensuring growth and development objectives are met.
There are many aspects to building a green economy, primarily significant investment in these activities through green financing, budgeting, and bonds, among other interventions.
Financial tools to enable and facilitate this
Investments in a green economy can also assist in the reduction of poverty through targeted wealth transfers, new employment, as well as improved access to the flow of ecosystem goods and services to the bottom of the economic pyramid (UNEP, 2010). Green finance is a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable economy. Green finance includes climate finance but is not limited to it. It also refers to a wider range of other environmental objectives, for example industrial pollution control, water sanitation, or biodiversity protection (Höhne et. al, 2012).
Green budgeting means using the tools of budgetary policy-making to help achieve environmental and climate goals. This includes evaluating the environmental impacts of budgetary and fiscal policies and assessing their coherence towards the delivery of national and international commitments (OECD).
Green bonds, which are fixed-debt securities, are primarily utilised for initiatives that seek to favourably affect the environment in order to assist the concept of green budgeting and simplify the understanding of green financing. Green bonds play a crucial role in mitigating carbon emissions and have helped raise $2.5 trillion globally, as of January 2023 (World Bank, 2023).
Green loans, which enable borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective (World Bank, 2021). If the loan aligns with the principles of ‘green loan’, only then can it be considered as a green one. Green loans are comparatively smaller than green bonds in terms of volume and transaction costs, even though both follow different but consistent principles.
Green banks are mission-driven institutions that use innovative financing to accelerate the transition to clean energy and fight climate change. They aim to deploy green energy rather than maximising their profits. They actively deploy a pipeline of clean projects and seek out opportunities in the market with an autonomy to be flexible and responsive to the real world (Coalition for Green Capital).
Domestic efforts
India has already embarked on its journey towards becoming a green economy. In 2009, it set an emissions reduction target of 20-25 percent by 2020 (compared to 2005 levels), but only achieved 24 percent of this target on time. Nonetheless, India has been one of the fastest adopters in the world of renewable energy sources. Later, in 2015, as part of the Paris Agreement on climate change, India outlined eight targets for the period 2021-30.
For the first time, the Union Budget (2023-24) had emphasised on green growth as one of its key priorities, focusing on environmentally sustainable economic growth, highlighting India’s commitment to combat and address climate change. Such efforts have been recognised, and it ranked 8th in the Climate Change Performance Index 2023 (Ministry of Environment, Forestry, and Climate Change).
India has also emerged as an active participant in the green bond market, joining the ranks of nineteen other emerging countries funding projects. While Fiji became the first emerging economy to issue a green bond in 2016, raising $50 million for climate resilience initiatives (World Bank, 2017), India’s journey in this space gained momentum only in recent years. In 2023, it launched its first green bond to raise about $2 billion for projects that contribute to climate change mitigation, adaptation, environmental protection, resource and biodiversity conservation, and net zero objectives (World Bank, 2023).
The Union Government is not alone in issuing green bonds, local governments also have taken a lead. For example, Ghaziabad Nagar Nigam (GNN) in 2021 issued India’s first green municipal bond followed by Indore, Ahmedabad and Vadodara. National Highways Authority of India (NHAI) also issued green bonds to support the Delhi-Mumbai Expressway project, spanning multiple states. According to the Securities and Exchange Board of India (SEBI), India has witnessed a surge in green bond issuances, with twenty companies raising an aggregate of $73.4 million between 2017 and 2024.
Way Forward
India’s commitment to this transformative journey to a green economy is demonstrated by such proactive steps. But the policy implementation journey is also not without any challenges. There is still an absence of a proper green finance taxonomy and casual reporting of data (ISPP, 2023). A robust framework with government-mandated disclosure standards for sustainability practices is crucial for instilling trust in green bonds. This will help streamline the process and also enhance India’s scope in the global green bond market and help it to significantly evolve.
This explainer has been co-written with Lekhani Hamen Raja, an intern at Artha Global.
