Context

• Inclusion of climate change and green finance in policy is crucial for a strong economy.

What is green finance?

• Green finance is a phenomenon that combines the world of finance and business with environment friendly behaviour. It may be led by financial incentives, a desire to preserve the planet, or a combination of both.
• In addition to demonstrating proactive, environment friendly behaviour, such as promoting of any business or activity that could be damaging to the environment now or for future generations.

Green finance instruments       

• Dedicated fund: A “green super fund” could be established to jumpstart green investments by pooling together international and domestic capital.
• Sovereign green bond (SGB): The sovereign green bond is a novel idea. It will be a part of the government’s borrowing programme. The gross borrowing programme of the government is pegged at Rs 14.95 lakh crore. The SGB (sovereign green bond) raised will be part of the aggregate borrowing programme and has to be used for projects which are ESG (environment, social and governance) compliant.

Network for Greening the Financial System

• The Network for Greening the Financial System is a network of 114 central banks and financial supervisors that aims to accelerate the scaling up of green finance and develop recommendations for central banks’ role for climate change.
• The NGFS was created in 2017 and its secretariat is hosted by the Banque de France.

Purpose

• The Network’s purpose is to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low carbon investments in the broader context of environmentally sustainable development.

Significance

• Green goals: Reaching net-zero emissions and other climate-related and environmental goals will require significant investments to enable decarbonisation and innovation across all sectors of the economy. Greening the financial system is key to making these investments happen.
• SDG goals: Green finance initiatives also aim to achieve the 2030 Sustainable Development Goals (SDGs), shifting the focus from creating value for shareholders (economic) to creating value for stakeholders (economic, environmental, and social).
• Green future: And as we begin to recover from the pandemic, green finance presents a huge opportunity to build back with a greener future, creating new businesses and jobs.
• Robust growth: Supports strong and green growth in all sectors of economy .

The issues in mobilization and effective use of green finance are

• Low incentives: The return on green finance is long term, low in monetary value & many times intangible, so that the ability of the financial system to mobilize private green finance, especially in developed countries is difficult.
• Distribution challenge: Developing countries like India have challenges of development & poverty alleviation, so allocation of resources towards meeting fundamental needs & promoting the green projects which require heavy investment is a challenge.
• Skewed investment: In many countries, green finance & much of the green projects are limited to the investment in renewable energy: India whose 60% of installed capacity is coal based, greening of coal technology is required which is mostly limited to private players in developed countries. It is subjected to IPR & makes them cost prohibitory.
• High risk: Green bonds are perceived as new and attach higher risk and their tenure is also shorter. There is a need to reduce risks to makes them investment grade.

Conclusion

• Our future depends on how we resolve our environmental challenges. Further, we are the world’s third-largest carbon emitter and will play a crucial role in getting the planet to a low-carbon trajectory. Simply put, we must urgently transform our economy to get to the green frontier.

Mains question

Q. As the world copes with the repercussions of carbon emissions, there is growing pressure to achieve climate-compatible growth. In this context What do you understand by the term green finance? Discuss how it will help to achieve climate-compatible growth along with limitations of green finance.

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