Climate advocates from WWF have noted that banks in India "suffer a relatively high climate physical risk." In 2019, India was the seventh most affected country according to the Global Climate Risk Index published by GermanWatch, with more than 2,000 climate-related fatalities and losses of nearly US$70 billion. WWF has also flagged that India could be exposed to green swan risks, rare and unexpected events with extreme impacts that could trigger the next systemic financial crisis.
Green finance is progressively gaining traction in India. The Reserve Bank of India issued a framework for the acceptance of green deposits by regulated entities, which took effect from 1 June 2023. Some regulated entities were already offering green deposits to finance green activities and projects before the framework came into force.
Purpose
The RBI's stated rationale for the framework is to encourage regulated entities to offer green deposits to customers, protect the interest of depositors, help customers pursue their sustainability goals, address greenwashing concerns, and help increase the flow of credit to green activities and projects.
Where the Proceeds Can Go
The allocation of proceeds raised from green deposits is meant to be based on an official Indian green taxonomy. Pending its finalisation, regulated entities are required, as an interim measure, to allocate proceeds towards a specified list of green activities and projects. Those projects must encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience and adaptation, and value and improve natural ecosystems and biodiversity.
The permitted categories include renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, and green buildings.
What's Excluded
The RBI has also set out a list of exclusions. Proceeds cannot be directed towards projects involving new or existing extraction, production and distribution of fossil fuels, nuclear power generation, or direct waste incineration. Banks and NBFCs offering green deposits are required to put in place a comprehensive, board-approved policy governing them.
Green deposits are one of several financial tools now being shaped around climate objectives, and their use, along with the broader impact of financial solutions to climate change, is likely to keep developing over the coming years.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.