India is ranked the fifth most vulnerable nation to the effects of climate change with 2.5-4.5% of its GDP at risk annually. As a result, India has pledged to reduce its carbon intensity by 33-35% by 2030 from its 2005 levels, but to achieve this target, India needs to mobilize a total of $2.5 trillion over 2016-30 (MoEFCC, 2015). However, climate-related investments—from public and private sources—remain limited. An upcoming study by CPI finds that India is mobilizing less than 25% of investment needed to reach this target (CPI, 2020).
While India has adopted a number of fiscal and policy measures to address this challenge, increasing green investments at this scale will require a more intense focus of India’s financial system towards green sectors (UNEP Inquiry, 2015).
There is a growing need to sensitize India’s financial sector to the importance and benefits of Green Finance.
A major barrier in this effort is the lack of an agreed definition of Green Finance in India. While there are a number of international initiatives that focus on aligning definitions, disclosure, and reporting practices, India’s financial sector is not fully aligned with any organized efforts to accelerate green lending and investment. There is a growing need to sensitize India’s financial sector to the importance and benefits of Green Finance. This can happen through sustained, market-led collaborative actions that accelerate green capital flows, beginning with an agreed definition of Green Finance.
An agreed formal definition of Green Finance in India would enable more precise tracking of finance flows to green sectors, which, in turn, would help design effective policy, regulations, and institutional mechanisms directed towards increasing both public and private investments in green sectors.
A formal definition of Green Finance in India would deliver immediate benefits. It would enable more precise tracking of finance flows to green sectors, which, in turn, would help design effective policy, regulations, and institutional mechanisms directed towards increasing both public and private investments in green sectors. A formal definition would also accelerate the development of green financial products/services for investors and depositors, enabling financial intermediaries to assess their climate change risks and opportunities, and improve reporting and disclosure practices. These benefits would have immediate impact on accelerating green finance.
India’s Green Finance definition could be formed through a combination of adopting international practices, developing a set of principles for green economic activities, and obtaining stakeholder views. Our analysis finds that a combination of these approaches may be the best fit for India, with a finance sector taxonomy foundational to driving green economic activity.
This definition could be a first step toward developing a green finance strategy in India. Additional steps would include disclosure of climate change risks in the financial system, directed policy and regulations to incentivize green finance, and penalties for carbon-intensive investments. CPI proposes forming a taskforce of relevant stakeholders to take forward these approaches.