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Why does India need a Sustainable Financial System?

By Disha Sachdeva

Edited by Madhavi Roy, Senior Editor, The Indian Economist

When banks extend credit, it results in the creation of money. The creation and the allocation of this money among industries (which, in some cases, do not control pollutant levels) ultimately influences the nature of economic growth. Taking this into account, one understands the power and influence banks have in the economic system to provide finance to industries with a considerable environmental impact.

India’s economic development has come at a great cost to the environment, simply because many believe that sustainability and financial success cannot co-exist together. Today, this has created a challenge in front of the policy makers to make clean and affordable water and electricity available for all, build infrastructure for smart cities and manage waste. The fund requirements for such imperative requirements are huge. Moreover, this also calls for integrating the environmental and social factors, like climate change and natural disasters, into the financial system of the country, as they are posing a threat to India’s growth. For example, a climate change induced crop-price increase of even 1% will have a sevenfold impact on the profitability of a sugar company.

Sustainable financing means channelling capital to India’s real economic needs. Take renewables, for example. The country wants to increase its solar target to 100GW of installed capacity by 2022, which is a fivefold increase and requires an investment of around $45 billion. This would offer attractive long term cash flows with zero fuel risks, but domestic public funds alone are insufficient to finance it. Such financing also faces barriers from risks associated with political, regulatory, technological, and financial aspects that affect the bankability of new projects.

Therefore, mechanisms are urgently needed to raise and leverage private capital as well as international financial flows. As a part of this, it is critical that the financial system’s capacity to respond to climate change and other sustainable development priorities is enhanced. India’s bond market can also prove to be a source of capital.

 Green Bonds are those bonds whose proceeds are used to fund environment-friendly projects and are usually exempt from tax. Globally, their issuance has reached US$34 billion, till date. The proceeds from these funds can be given to wind and solar farm developers. At present, issuance of bonds for clean energy in India is largely limited to the Indian Renewable Energy Development.

Also, a range of voluntary and legislative actions in India have increased the scope for sustainability. This has resulted in a new momentum towards adoption of sustainable practices and initiatives. The 2% CSR mandate under the Companies Act has made it compulsory for certain classes of companies to spend at least 2 percent of their average net profits made during the three immediately preceding financial years on ‘corporate social responsibility’ activities. Further, such sustainable policies for financial institutions and companies need to be developed.

Climate change is expected to hit developing countries the hardest. Other BRICS nations have already started financing green activities and are treating it as an expansion of financial inclusion. Examples include China’s green credit guidelines, a resolution by Brazil’s central bank on environmental and social risk and South Africa’s inclusion of ESG (environmental, social and governance) factors into pension fund policy. India, too, needs to build a sustainable financial system that will serve its developmental needs. The Small Industries Development Bank of India has found that loans to energy efficient companies have a better loan recovery rate than the norm.  Achieving this will ensure that the people of the country will get energy, food, housing and sanitation, as in the long run, finances and sustainability are not at odds.

Disha Sachdeva is a 2nd year student pursuing Bachelor of Commerce from Shri Ram College of Commerce. Her biggest fear is that her ‘To Be Read’ list might be longer than her life expectancy. She is a feminist who prefers to hear both sides of a story before forming her opinion. She tries to balance her academics, societies, MBA preparation and attendance together and hopes to be fluent in Dothraki one day!

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