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For MSMEs to embrace green technology, financial guarantees for green bonds are necessary.
Mumbai In collaboration with the World Trade Centre Mumbai and the All India Association of Industries (AIAI), the TERI Expert Group on Financing India’s Long-Term Low Carbon Development Strategies (LT-LCDS) organised a high-level roundtable.
Key players from the financial and industrial sectors were present at the event, including representatives from the World Bank, Tata Cleantech Capital Limited, Axis Bank, SEBI, the Reserve Bank of India, and Nippon Steel. In order to overcome the financial obstacles that are essential to facilitating India’s shift to a low-carbon economy, the discussion emphasised the necessity of policy alignment and creative funding methods.
In his speech, SEBI Executive Director Mr. Pramod Rao discussed the steps the market watchdog has done to protect investors and encourage funding for real decarbonisation initiatives. “The Business Responsibility and Sustainability Report (BRSR) Core sustainability disclosure standard was introduced by SEBI for the top 150 listed companies in September of this year,” he stated. Third parties evaluate corporate disclosure under BRSR Core in comparison to BRSR, where disclosure is predicated on self-declaration. Mutual funds are required to invest at least 65% of the assets earned via their ESG fund schemes in BRSR Core-compliant businesses. The first nation to regulate ESG rating agencies is India. The nation’s ten to twelve licensed ESG rating agencies are required to release three reports that are based on BRSR Core.
Mr. Rao emphasised that SEBI has been implementing these investor assurance procedures in order to maintain the flow of capital into legitimate decarbonisation projects and to foster investor trust. “We are witnessing a robust influx of funds from retail investors in recent years, as evidenced by the high monthly inflows into mutual fund SIP schemes, the rise in F&O trading, and the bullish trend in the SME IPO market,” he added. Over the past ten years, the monthly inflow from mutual fund SIP programs has increased from Rs. 23,000 crore to Rs. 65 lakh crore. By fostering investor trust with the aforementioned investor assurance measures, we must maintain this inflow.
“The country has created a market for green bonds since 2017, and we have expanded the eligible list of green projects covered under this bond to include renewable and sustainable energy, sustainable waste management, bio diversity conservation, pollution control and prevention, to name a few,” Mr. Rao said when discussing the ways in which corporate sustainability projects can be funded. Other finance tools including transition bonds, yellow bonds for solar power projects, and blue bonds for water management projects have also been established.
In order to encourage investment in decarbonisation projects and match the long-term finance requirements with our Nationally Determined Commitments (NDC) commitments, Mr. Rao outlined three areas of concern.
“Unlike in foreign markets where Indian companies can issue green bonds at a lower cost, there is no greenium or lower cost of capital for green projects in India,” he added. Companies can raise money at a reduced cost in international markets thanks to specialised investment funds that are mandated to invest in green projects (or profit from greenium in overseas markets). Long-term pension funds and insurance firms are not required to invest in green or ESG-related initiatives in India.
Mr Rao also brought up the issue of “green washing,” in which debtors obtain money by deceiving investors about the project’s environmental sustainability or ESG credentials. He said, “The growing prevalence of ‘green washing’ results in ‘green hushing,’ where even legitimate borrowers decide to understate the project’s green credentials out of fear of ‘green washing’ accusations.”
“Indian MSMEs need Rs. 17,000 crore to adopt energy saving technologies and Rs. 72,000 crore to invest in rooftop solar power,” stressed Dr. Vijay Kalantri, President of the All India Association of Industries (AIAI), Chairman of the World Trade Centre in Mumbai, and Board Director of the World Trade Centres Association in New York. By setting aside specific funds for the MSME sector’s energy transformation, the government and banking institutions may help MSMEs close this funding gap. For financing for green energy projects, MSMEs also require interest subsidies.
“Indian MSMEs are unable to raise green bonds from the foreign market due to poor credit rating,” Dr Kalantri added. For MSMEs to be able to issue green bonds at competitive interest rates, the government must assist them with credit improvement and credit guarantees.
The Distinguished Fellow at TERI, Mr. R R Rashmi, recommended that MSMEs use low-cost strategies to cut carbon emissions. These low-cost strategies include electrification (using electric machinery and cars that run on electricity instead of petrol or diesel), the adoption of circular economy principles, and the deployment of energy-efficient technologies and practices.
Mr. Rashmi said, “As part of its Low Emission Development Strategy, the Government of India is creating a sectoral energy transformation roadmap. In particular, the government is attempting to implement energy intensity reduction goals for around nine industries that fall within the purview of the Energy Conservation Act. The establishment of an active carbon trading market in the nation and indirect carbon pricing would be made possible by the introduction of these goals.
Mr. Mahesh Date, Vice President of the Ichaalkaranji Engineering Association and Secretary of the Indian Institute of Foundrymen, Western Region, discussed his thoughts on Kolhapur’s foundry industry’s embrace of green technology. In order to reduce sand waste and encourage effective sand use in foundry units, Kolhapur Foundry has successfully established a sand recycling plant, he reported. Such environmentally friendly MSME sector projects require government backing. MSME units may get capital subsidies or viability gap assistance from the federal and state governments for energy saving initiatives, waste recycling, the establishment of common facility centres, and effluent treatment facilities.
The Mahratta Chamber of Commerce, Industries & Agriculture’s former head of the sustainability desk, Mr. Chetankumar Sangole, proposed four cooperative strategies to close the MSME sector’s funding gap for green technology adoption. Establishing special purpose companies and industry-government joint ventures are two strategies to pool investible money for MSMEs’ sustainable initiatives, he added. The implementation of a cluster-based finance strategy, a supply chain-linked market model, and a regulatory and policy package are the other three synergistic approaches. The government may implement green taxonomy, green public procurement standards, priority sector lending for green projects, ESG-linked financing by banks and NBFCs, digitisation, decarbonisation targets, and compliance monitoring as part of the regulatory and policy package.
According to a senior State Bank of India spokesman, the bank has obtained a Euro 700 million line of credit from international organisations like the World Bank to finance climate mitigation initiatives including compressed biogas, rooftop solar power, biogas, city gas distribution, and so forth. In order to clarify the categorisation of bank investments or assets according to their influence on environmental sustainability, the representative recommended that the government implement a green taxonomy. “We are using the adhoc taxonomy that the RBI introduced to classify our investments and assets in the absence of the green taxonomy,” he stated.
The roundtable discussed ways to support the transition and sustainable industrial growth, with an emphasis on decarbonising the supply chain and challenging industries like cement and steel. In order to achieve India’s 2070 net-zero emissions objective, which was declared at COP26 in Glasgow, participants underlined the necessity of coordinating the country’s economic activity with climate-positive measures. The discussions highlighted the necessity of international assistance, cutting-edge technology, and customised finance schemes to address the changing low-carbon development issues.
Because of its capacity to provide flexibility, innovation, and local economic stimulation, the Micro, Small, and Medium Enterprises (MSME) sector was emphasised during the talks as being essential to supply chains spanning several economic sectors. The panellists emphasised how crucial it is to direct green money towards MSMEs in order to encourage their adoption of automated systems and energy-efficient technology. In order to encourage sustainable operations, they also emphasised the necessity of cluster-level actions and regulatory incentives.
The need for significant investment and innovation in industries like steel and cement was brought to light at the session on “Perspectives by Expert Group Members: Call-to-Action on Financing Hard-to-Abate Sector Decarbonisation.” In order to create a sustainable market for low-carbon products, participants underlined the importance of legal frameworks, demonstration initiatives, and allocated funding.
Expert group participants emphasised the necessity of cooperation, regulatory support, and focused investments to promote decarbonisation throughout value chains during the “Call-to-Action on Financing Supply Chain Transitions” session.
In anticipation of COP29 in Baku, the discussion closed with important lessons learnt and initiatives for the future. The need of cross-sector coordination in promoting climate action, assisting MSMEs, and easing the transformation of industries that are difficult to combat was reiterated by the participants.
With the insights gathered at this roundtable, the TERI Expert Group will continue to work toward crafting actionable strategies to address the financing needs for sustainable growth in India.
Addressing the Roundtable of Expert Group on Financing India’s Long-Term Low Carbon Development Strategies at WTC Mumbai was Dr. Vijay Kalantri, President of the All India Association of Industries (AIAI), Chairman of the World Trade Centre in Mumbai, and Board Director of the World Trade Centres Association in New York. The picture also features additional luminaries, including Mr. R R Rashmi, Distinguished Fellow, TERI.