Sovereign green bonds, will over a period of time, provide a pricing reference for private sector entities’ ESG-linked borrowing, thus creating an ecosystem that fosters greater flow of capital into green projects and entities undertaking such projects, said RBI Deputy Governor Rajeshwar Rao.

The government had, in the Union Budget for FY23, proposed that it will issue sovereign green bonds (SGBs) as part of its overall market borrowings, to mobilise resources for green infrastructure and public sector projects.

Rao noted that green finance must be scaled up rapidly to meet India’s climate targets (of net-zero emissions by 2070) under the updated Nationally Determined Contribution communicated to the United Nations Framework Convention on Climate Change (UNFCCC) in August 2022.

“The enhanced ambition requires mobilisation of green finance at a much faster pace. For example, green infrastructure investment trusts could help scale up green finance as also deepen the local bond market. But in the end, all these ideas need a clear intent from all stakeholders in order for them to be implemented and sustained,” he said.

Last month, Finance Minister Nirmala Sitharaman approved the framework for sovereign green bonds, following which Minister of State for Finance Pankaj Chaudhary on Wednesday said the first set of such bonds is likely to issued by March 2023.

Rao highlighted that India was the second highest issuer of green bonds among emerging economies in 2021. He added that RBI, too, set up a Sustainable Finance Group in May 2021 to evaluate the regulatory and supervisory approach and frame guidance on climate risk and sustainable finance.

Incorporating climate risk and ESG-related considerations into commercial lending and investment decisions while simultaneously balancing the needs of credit expansion, economic growth, and social development, continues to be a challenge for India, Rao said at the BFSI Summit organised by a financial publication.

The Deputy Governor observed that climate change may result in physical and transition risks that could have implications for the physical safety and financial soundness of individual regulated entities, as well as for the stability of the financial system.

Thus, there is a need for regulated entities to develop and implement comprehensive frameworks for understanding and assessing the potential impact of climate-related financial risks in their business strategy and operations.

We need to be conscious that climate risk is the biggest challenge confronting us and addressing it decisively is our joint responsibility. The financial sector has a key role to play as it is the sector that finances businesses and can influence their activities.

“Banks would have their role cut out in handholding the businesses and arranging for transition finance required by the firms as they try to shift their strategies to make them more sustainable and planet friendly,” he said.

The central banks can play a significant role in shaping the response of the financial sector to the challenges posed by risks emerging from climate change through appropriate guidance and regulations, he added.

“”The Indian economy is at a stage where we need to grow rapidly, but the challenge before us is to think of ways to incorporate climate risk and ESG-related considerations into commercial lending and investment decisions, while simultaneously balancing the needs of credit expansion, economic growth, and social development. Collective engagement would help build on our early progress and go a long way in addressing the challenges of climate change,” the Deputy Governor said..