85% Banks rely on ESG ratings for Financial Strategy

A report from CDP highlights the increasing importance of Environmental, Social, and Governance (ESG) ratings in financial institutions’ strategic frameworks.

In 2023, 85% of FIs used ESG ratings to identify climate-related opportunities, managing over $4 trillion in assets.

Key findings:

The growing demand for ESG ratings and data products has led to increased scrutiny and regulation.

The International Organization of Securities Commissions (IOSCO) has proposed a framework for improved oversight and transparency.

Major jurisdictions like Japan, Hong Kong, Singapore, the UK, India, and the EU have adapted their regulatory frameworks to align with IOSCO’s guidelines. The report also highlights the growing use of ESG ratings by 94% of investors.

Standardized definitions are needed to prevent market confusion and enhance policy alignment.

For ESG ratings and data products to support sustainable finance effectively, regulations must be interoperable across borders.

Maintaining consistency with IOSCO’s baseline is vital for fostering a robust and unified ESG regulatory environment.

Conclusion:

Interoperable regulations across borders are crucial for ESG ratings and data products to support sustainable finance effectively. Consistency with IOSCO’s baseline is essential for a robust and unified ESG regulatory environment.

Despite initial concerns about the sheer scale of the hurdles in sustainable energy, India’s 2070 net zero goal is gaining traction with stakeholders encouraged by recent policy actions.

In a bid to boost the adoption of renewable energy and also enable scalability of projects, the Central government upped its ante for the sector.

Here are the four key announcements for sustainable energy:

MNRE guidelines for green hydrogen in the transport sector: The Ministry of New and Renewable Energy (MNRE) has issued guidelines for pilot projects involving the use of green hydrogen in the transport sector. A budget of Rs 496 crore has been allocated for the scheme until the financial year 2025-26. The pilot projects will be implemented through the Ministry of Road Transport and Highways and the Scheme Implementing Agencies nominated under the scheme. The scheme also aims to support other innovative uses of hydrogen for reducing carbon emissions in the transport sector, such as blending methanol/ethanol based on green hydrogen and other synthetic fuels derived from green hydrogen in automobile fuels.
Joint Center for Renewable Energy Innovation and Sustainable Energy Transition: Union Minister R.K. Singh announced the Center for Energy Transition, a joint venture between the Indian government and The Energy and Resources Institute, focusing on developing renewable energy ideas and sustainable energy transition routes.
Nitin Desai, the chairperson of the TERI Governing Council, announced that the Center will be established in Hyderabad to create all-encompassing energy transition pathways.
Five SPVs awarded: REC Power Development and Consultancy Limited handed over five project-specific special purpose vehicles for inter-state transmission projects construction, under Ministry of Power supervision.
The Indian Ministry of Power has chosen Power Grid Corporation of India Limited, Indigrid 2 Limited & Indigrid 1 Limited (Consortium), and Apraava Energy Private Limited as successful bidders for the ISTS Transformation Projects. RECPDCL awarded Letters of Award to Avaada Energy Private Limited and Juniper Green Energy Private Limited for establishing 100 MW wind power projects under India’s flexible generation and scheduling scheme.
PFC and CEEW Form Strategic Partnership for Net-Zero Energy transition: Power Finance Corporation Ltd. and the Council on Energy, Environment, and Water have partnered to achieve India’s 2070 Net Zero target, making PFC the largest renewable energy financier in India. The two entities are collaborating for research, policy, and innovation to strengthen their role in India’s net-zero target and clean energy technologies, laying the groundwork for future initiatives.
PFC is partnering with the Revamped Distribution Sector Scheme (RDSS) to expand its green portfolio and strengthen its position in India’s clean energy transition. The partnership aims to analyze net-zero finance requirements, new lending trends, and financing for clean energy technologies, identify emerging global capital pools, and understand climate finance products.

The Indian banking sector is taking a green leap!

As per IEA estimates, India requires Rs 160 billion per year till 2030 for its energy transition/decarbonization journey. That means the country has a large opportunity for green funding. It could be met with a combination of domestic and international funds. As a first respondent, domestic funds would be the target.

India’s plan to establish a Green Bank by 2023 could significantly impact the global market, despite requiring an estimated $1.5 trillion investment by 2030. On January 25, 2023, India issued the first tranche of its first sovereign green bond worth INR 80 billion (equivalent to $980 million). On February 9, 2023, the Government of India announced the issuance of another INR 80 billion ($968 million) in sovereign green bonds.

For the last couple of years, Indian entities including financial institutions have been cautiously taking steps towards green financing. But it is not visible yet. However, a few headlines that caught my attention in the last few days stamp the inevitable.

Google, HSBC to offer venture debt financing option to GCR-Sustainability
HDFC Bank raises $300M through maiden sustainable finance bond
The DBS Bank supports the Indian arm of Louis Dreyfus to achieve sustainable finance for RSPO-certified palm oil procurement
SBI raises $250 million through green notes

Incidentally, the Indian banking sector is working towards achieving net-zero targets by 2070.

Sustainable initiatives from the banks are no longer limited to extending support through CSR, digitization, or green energy adoption. These are taking the shape of true green financing products.

The Indian banks have embarked upon a slew of measures to support sustainable finance. Besides issuing green bonds, the banks are showing a keen interest in financing green infrastructure, renewable energy, water, and waste management projects, among others.

No longer is the Indian bank transacting in a silo. A majority of the banks have gone paperless and are adopting renewable energy to promote sustainability internally. They are giving more weightage to the green factors while dealing with the external stakeholders.

And it is not just the global and domestic compliances that have triggered the change. They are active participants in the call to action to save planet Earth and limit the global temperature to pre-industrial levels by Paris goals.

Green banking-the current scenario:

According to reports, the combined net profits of 32 listed private and public sector banks (PSBs) rose 40.56 percent to close to Rs 2. 29 trillion with both sets of banks crossing the Rs 1 trillion mark in net profits and a few recording their highest-ever net profits.

Indian banks are introducing new financial products linked to green initiatives, attracting investment and encouraging businesses to adopt greener practices. There is a shift from investments only in the renewable sector to more sectors now.

The banks have a social responsibility to promote sustainable practices, including environmental contributions. Sustainable finance involves financing both current and transitioning to environmentally friendly performance levels.

India has two finance organizations, Tata Cleantech Capital Limited (TCCL) and the Indian Renewable Energy Development Agency (IREDA), focusing on clean energy financing. IREDA provides funding for projects and plans to launch India’s Green Window, aiming to attract over Rs 210 billion in renewable energy investments. TCCL, a leading private sector Green Bank, has financed over 250 projects, reducing carbon emissions by nearly 16 MT annually.

SBI has launched the Green Chanel Counter and collaborated with Suzlon Energy Limited to generate green power. Other initiatives include tree planting, rainwater harvesting, and solar lamps in rural areas.

Indian banks focus on supporting environmentally friendly projects like renewable energy and agriculture to reduce their carbon footprint.

Global interest:

Green finance is gaining momentum in India’s economy as a tool for transitioning towards net-zero emissions. International organizations like the Asian Development Bank and World Bank have increased funding for green projects in India to reduce the gap in commercial investments in renewable energy and boost investor confidence. Indian green bond issuances reached $21 billion as of February 2023, with the private sector contributing 84% of the total.

Challenges:

Since 2007, India has promoted green financing, with Green Banks adhering to strict environmental standards. India’s green financing, including sustainability-linked loans, bonds, and equity investments, is undergoing continuous evolution, with increased demand driving innovation in this area. Currently, creating a Green Bank is unregulated, but effective regulation requires disclosing carbon emissions.

Green banks face challenges driving a reformative shift towards a sustainable economy, including limited funding, political and regulatory uncertainty, lack of awareness, limited market demand, risk management, and scalability. Additionally, they may struggle to expand their operations and finance larger projects.

How to overcome these challenges:

Green banks can promote sustainable finance by enhancing public awareness, increasing access to capital, developing safeguarding policies, focusing on innovation, and building a tailored track record.

Technology plays a significant role in green finance, enabling banks to comply with reporting rules, improve practices, and model climate risk, with growing awareness of its potential.

The other methods are:

Creating marketing campaigns
Collaborating with other financial institutions
Working with governments to implement regulations requiring financial institutions to report on their ESG performance
Partnering with established institutions on sustainable projects

Our take:

The Indian government should allocate capital towards regional green banks and windows, using low-cost public funds and government guarantees to finance renewable energy projects and reduce carbon emissions.

Louis Dreyfus Company India Pvt Ltd (LDC) has secured sustainable finance for the procurement of palm oil certified by the Roundtable on Sustainable Palm Oil (RSPO).

In line with its commitment to responsible banking, DBS Bank Singapore supported the Indian arm of the global enterprise. The milestone was achieved by implementing the bank’s Supplier Payment Services (SPS) solution.

The RSPO promotes sustainability in the palm oil industry and the supply chain. It enforces globally recognized standards and audits certified producers. This program aligns with the bank’s bigger goals to improve sustainable financing while offering its clients tools to help them achieve their sustainability objectives.

Divyesh Dalal, Managing Director & Head, Global Transaction Services, SME and Institutional Liability Business, DBS Bank India, said, “This transaction represents a significant milestone, underscoring the crucial role of sustainable finance in catalyzing positive change. Our innovative SPS solution champions responsible sourcing practices and optimizes working capital management. By combining financial innovation with a strong commitment to sustainability, we empower businesses to make a lasting impact on the environment and society.”

94 % of investors in a recent PWC survey said that corporate reporting on sustainability performance contains unsupported claims.

Sustainability continues to be pivotal for investors:

Sustainability continues to remain pivotal to investors, according to the PWC report. Investors are looking for stronger reporting standards amid greenwashing concerns.

75% said that how a company manages sustainability-related risks and opportunities is an important factor in their investment decisions, although this is down 4% from last year.

Investors this year highlighted a strong undercurrent of doubt around the reliability of sustainability reporting and information. This is often referred to as greenwashing.
• 94% believe corporate reporting on sustainability performance contains some level of unsupported claims (up from 87% in 2022)
• 15% think unsupported claims to be high to a very large extent
• 79 % said unsupported claims are present to a moderate or greater extent, which is up one percentage point from last year
• 57% said if companies meet the upcoming regulations it will meet their information needs for decision-making to a “large” or “considerable extent”
• The upcoming regulations include CSRD, the SEC proposed climate disclosure rules in the US, and ISSB standards

These perceptions of greenwashing may explain why investors are looking to regulators and standard setters to create clarity and consistency in companies’ reporting, PWC said.

Investor focus:

The focus of investors on meeting the cost of ESG commitments has also risen, the PWC researchers noted.

• 76% of investors find this information important or very important.
• 75% agree that companies should disclose the monetary value of their impact on the environment or society, up from 66% in 2022
• 85% say that reasonable assurance (akin to an audit of financial statements) would give them confidence in sustainability reporting to a “moderate”, “large”, or “considerable extent”

The survey – now in its third consecutive year – queried 345 investors and analysts across geographies, asset classes, and investment approaches. The aim was to get insights into the factors that most affect the companies they invest in and cover.

Key highlights:

• Three-quarters of investors say sustainability is important to their investment decisions
• More than half (57%) back greater clarity and consistency in sustainability reporting
• Technological transformation is driving the investment landscape
• 59% identified technological change as the most likely factor to influence how companies create value over the next three years
• 61% say faster adoption of AI is very or extremely important
• Macroeconomic and inflationary concerns fall from 2022 highs
• Concern about climate change rises from 22% to 32%, putting climate on par with cyber risks

Investors favor accelerated AI adoption, despite risks

This year’s survey findings show investors view the accelerated adoption of artificial intelligence (AI) as critical to value creation while recognizing the importance of managing risks.

• 61% say faster adoption is “very”, or “extremely important”
• 85 % noted moderately important
• 59% identified technological change as the factor most likely to influence how companies create value over the next three years
• Innovation and emerging technologies (including AI, the metaverse, and blockchain) among their top five priorities for evaluating companies
• 86% see AI presenting considerable risk from a “moderate” to “very large extent” when it comes to data security and privacy; insufficient governance and controls (84%), misinformation (83%); and bias and discrimination (72%).

Quotes:

Nadja Picard, Global Reporting Leader, PwC Germany said, “We are seeing significant steps towards more consistent reporting from companies around climate change, however, there is a need for improvement. All the while, investors are calling for greater engagement around how companies manage the opportunities and risks of new technologies, particularly generative AI, as new technologies increasingly drive business transformation and investment.”

James Chalmers, Global Assurance Leader, PwC UK, said, “We are moving from a period of awareness raising around the importance of climate and technological change to a time where investors are increasingly asking specific and tough questions about how companies are addressing those issues in their strategy, how they assess risk and opportunity, and what is truly material for them. In this context, corporate reporting needs to continue to evolve so it provides reliable, consistent, and comparable information investors – and other stakeholders – can rely on.”

Global leaders at the recently concluded World Sustainable Development Summit (WSDS) emphasised the need for sustainable finance to fuel green growth.

The speakers emphasised the lack of new instruments to facilitate long-term lending to fuel green growth, particularly in emerging economies and least-developed countries.

Among the speakers, here’s a round-up of what six key global leaders said at the summit.

“Though renewable energy has received adequate funding, areas such as climate adaptation, sustainable consumption and production, biodiversity, ecosystem integrity, and pollution abatement have not received the necessary funding”: Dr Vibha Dhawan, Director General, The Energy and Resources Institute (TERI)

“Finance is central to combating climate change. The central question here is whether we can transform the global financial system to meet today’s challenges in ways that promote low-carbon, resilient growth”: Manish Bapna, President Natural Resources Defence Council, India

“ADB is currently developing innovative financing models to facilitate the transition to clean energy by financing the retirement of coal-fired power plants and repurposing them to provide renewable energy and grid services, as well as lending to countries to develop climate change policies”: Dr Pradeep Tharakan, Regional Advisor, South Asia, Asian Development Bank (ADB)

“Facilitating climate finance and diversifying the fiscal base to support green growth should lead the priorities list. Capacity building should be prioritised to achieve the necessary transformational change. Both national and sub-national finance ministries must boost their capacity with tools like green budgeting and carbon tax and pricing”: Helen Clarkson, CEO, The Climate Group

“We need three things: a vision of what we want to do, an inter-institutional framework to do what we want to do and leadership”: Laszlo Broberly, state counsellor to the prime minster of Romania

“Our recommendations on climate finance would be to expand the scope of climate finance and make climate smart transition of the financial sector overall,” according to the Green Development Pact. Also, rather than improving the resilience of existing infrastructure, let us build infrastructure that improves our resilience”: Jagjeet Singh Sareen, Principal, Dalberg Advisors

Source: ANI Press Release

Tag: Sustainable finance

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