Green Finance: A Good Reason for New Business Responsibility Reporting.

Due to a convergence of several factors, global investors are now starting to move beyond calculating purely financial performance of their investments by progressively taking non-financial metrics into consideration. Many groups of institutional investors have transitioned towards the inclusion of Environmental, Social and Governance (ESG) and sustainability considerations in their investment decisions. This has resulted in an increased demand for ESG information among investors; a trend which has brought global investors to the forefront of driving the non-financial disclosure agenda. The recent step taken by Ministry of Corporate Affairs (MCA) to update and capture key national and international developments in the business responsibility field that had occurred over the five years and that have elapsed since the release of the NVGs will be the right step in direction of helping Companies raise finance in both national and international markets. This article tries to understand our Environmental, Social and Governance (ESG) and sustainability Reporting genesis and evolution and tries to correlate it with new form of financing called the Green Financing.

Evolution of ESG Reporting in India:

In 2007, the then Prime Minister of India, Dr. Manmohan Singh addressed a gathering of eminent figures of the business community at the Confederation of Indian Industries (CII). In his speech, he spoke about how in democratic society, business must realize its wider social responsibility. He stressed on “If those who are better off do not act in a more socially responsible manner, our growth process may be at risk, our polity may become anarchic and our society may get further divided.” 
This address by Dr. Manmohan Singh was pivotal in setting the tone of a series of future policy conversations on promoting Responsible Business in India.

The Ministry of Corporate Affairs released Voluntary Guidelines on CSR in 2009 as the first step towards mainstreaming the concept of Business Responsibilities. Keeping in view the feedback from stakeholders, it was decided to revise the same with a more comprehensive set of guidelines that encompasses social, environmental and economic responsibilities of business. These newly evolved Guidelines launched by the Ministry of Corporate Affairs (MCA) after several directives and policy consultations.

Understanding Green Finance:

Green finance is a broad term comprising market based investing into sustainable development projects and initiatives. It is a lending program that reasons environmental impact on risk assessment and utilizes environmental incentives to drive business decisions. It basically encourages the development of a more sustainable economy.

Definition: There is no one single definition that defines Green finance in totality.

1. Höhne / Khosla / Fekete / Gilbert (2012): "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. Mitigation and adaptation finance isspecifically related to climate change related activities: mitigation financial flows refer to investments in projects and programs that contribute to reducing or avoiding greenhouse gas emissions (GHGs) whereas adaptation financial flows refer to investments that contribute to reducing the vulnerability of goods and persons to the effects of climate change.

2. Pricewaterhouse Coopers Consultants (PWC) (2013): "For the banking sector, green finance is defined as financial products and services, under the consideration of environmental factors throughout the lending decision making, ex-post monitoring and risk management processes, provided to promote environmentally responsible investments and stimulate low-carbon technologies, projects, industries and businesses."

3. Organisation for Economic Co-operation and Development (OECD): Green Finance is finance for “achieving economic growth while reducing pollution and greenhouse gas emissions, minimising waste and improving efficiency in the use of natural resources.”

Green Finance in India:

In India banks such as SIDBI, IDBI, YES Bank and others have associated with several initiatives to promote lending for Sustainable growth technologies particularly in MSME sector. Banks have created exclusive groups to work on Climate change and more specifically on carbon credits advisory services. This group has devised a structured product for providing upfront finance against the carbon credit receivables. The product is well accepted by the Indian project developers.

There are several ways in which these banks and Developmental Financial Institutions such as IDBI; UTI; EXIM Bank; SIDBI etc can contribute to green growth. Firstly, they can revamp their internal systems to move towards energy efficiency and move to e-transactions and e-statements, converting their buildings into green premises. Secondly, they can assess environment, social and governance (ESG) risks while appraising projects for financing, and thirdly, they can introduce green financial products such as green bonds.

India’s green bond market is currently pegged at about $3 billion, with the majority of it being allocated to renewable energy projects – contributing directly towards achieving India’s NDCs. Green municipal bonds hold promise towards building the 100 smart cities planned by India, through market interventions to revive the dormant municipal bonds market.

Yes Bank has raised over Rs 1,000 crore by floating green infra bonds and Exim Bank has obtained $500 million through the issue of green dollar bonds, while IDBI is also set to attract global investors in this arena. The Reserve Bank of India has included renewable energy project financing as a part of priority sector lending category in July 2015.

Investors that are incorporating ESG information exist along a range of ESG impact and return which varies based on their appetite for environmental/social impact vs. financial return. Collectively, cKinetics has coined these investors “Finance+ Investors” signifying their penchant for looking beyond pure profit. Research by cKinetics has found that these Finance+ Investors are distributed across 5 major groups which annually deploy $18 billion of capital in India: Development Finance Institutions, SRI Funds, Private Equity Asset Managers, Social Investors and Banks with Responsible Finance Initiatives.
However, there are some inherent challenges to such initiatives, these are:

1. Lack of Standardization: The information used by different groups of investors is not standardized and there is no consistent way of conducting risk or impact assessment – a gap which affects all investors (from impact investors to larger institutional investors)

2. Limited depth of market: Only a handful of companies are currently disclosing ESG data, this increases the cost of collecting data in the screening and due-diligence processes for impact and equity investors evaluating firms’ environmental/social performance.

However, despite these challenges, research in India has indicated investors are not only interested in ESG information, but they also accord a higher value to businesses with progressive levels of ESG disclosure / reporting. A recent report has found strong correlations between ESG disclosure / reporting of businesses and their “investability” (or the capital flows attracted by them).

In Conclusion:

Environmental, Social and Governance (ESG) and sustainability Reporting is a disclosure of adoption of responsible business practices by a listed company to all its stakeholders. With the updating of this Guidelines the need to encourage Businesses to ensure that not only do they follow the Guidelines in business contexts directly within their control or influence, but that they also encourage and support theirs suppliers, vendors, distributors, partners and other collaborators to follow the Guidelines. For developing economies like India the challenge is to get Green Finance into mainstream Finance along with incorporating environmental impact into commercial lending decisions. This has to be done with simultaneous balance between the needs of economic growth and social development. Thus the core part of green finance which connects the financial industry, environmental improvement and economic growth in long run will be met.

Mobilization of huge financial resources towards climate sustainable future is only part of the challenge. Broader structural reforms are therefore needed if the financial system and sector are to deliver on sustainable development. And these reforms need to be implemented in a coordinated manner across industrialized and lower-income geographies. Only then can we level the playing field across global financial markets and reward prudent regulation, good corporate governance and long-term value creation. The crucial element is channelization of these funds to the emerging climate positive sectors and deployment of funds on time. It is now time for collaborative efforts to unleash the full potential of the new economy giving rise to a more sustainable and green development.