Why Green Finance Can Be the Lifeline Climate Targets Need

Green financing is helping the world fight climate change and mitigate its environmental depredations, showing extraordinary resilience even through periods of global turmoil. For example, it reached $1.46trn in 2022, despite the covid-19 pandemic, rising inflation and geopolitical tensions.

Money Matters

According to preliminary analysis, finance flows surpassed $1.5trn in 2023, driven primarily by renewable energy and low-carbon transport. In 2024, the Green Climate Fund (GCF) approved $686.8mn in financing to mobilise approximately $1.5bn for 11 projects across 42 countries, benefiting 115mn people.

India needs Rs 162.5trn by 2030 to achieve its Nationally Determined Contributions (NDCs). The proposed climate finance taxonomy in the Union Budget 2024-25 is a valuable step towards guiding India’s economy towards a sustainable and low-emission future.

By setting clear definitions for green investments and aligning them with national climate goals—like the updated NDC and the upcoming Adaptation Plan—the taxonomy will be instrumental in providing much-needed clarity, enhancing investor confidence, and driving the expansion of green and climate-related investments.

Green Stewardship

Beyond traditional financial metrics, several critical factors are leveraged to assess investment risks and opportunities. Investors committed to reducing their impact on the planet and promoting sustainability are inclined towards supporting companies with a similar vision and approach.

Environmental, social and governance (ESG) ratings are pivotal in enhancing investor confidence in sustainable assets as they offer a comprehensive evaluation of a company’s or a financial instrument’s sustainability profile by analysing its exposure to sustainability risks and its broader impact on society and the environment.

With capital markets increasingly integrating sustainability considerations, ESG ratings are playing a crucial role in shaping investment strategies and fostering investor trust in sustainable financial products.

The ESG investing market, valued at $27,480bn in 2023, is projected to reach $130,880bn by 2032, growing at a 17.31% compound annual growth rate (CAGR) in 2024–32.

ESG-focused investors prioritise and prefer companies addressing climate change and integrating sustainable business practices. They conduct rigorous assessments of corporate strategies related to carbon footprint reduction, renewable energy adoption, energy efficiency initiatives and net-zero emissions targets.

Additionally, participation in carbon offset programmes serves as a key indicator of a company’s dedication to environmental stewardship. The growing momentum behind ESG investing reflects a shift in investor priorities—seeking not only strong financial returns but also alignment with broader societal and environmental objectives.

Recent reports indicate a significant surge in ESG investments in India, rising from $330mn in 2019 to $1.3bn in 2023, highlighting the growing emphasis on sustainability-driven financial strategies. This heightened investor interest in ESG-focused companies has prompted regulatory interventions to enhance transparency and safeguard investors across jurisdictions.

In the UK, ESG regulations are embedded within multiple legislative frameworks, including the Corporate Governance Code by the Financial Reporting Council, which sets guidelines on board leadership, risk management and internal controls.

Additionally, the Companies (Strategic Report) Climate-related Financial Disclosure Regulations and Companies, Partnerships and Groups (Accounts and Reports) Regulations reinforce disclosure requirements, promoting corporate accountability and environmental responsibility.

Meanwhile, the US is transitioning from a voluntary to a mandatory ESG regulatory framework, aligning its approach with the European Union. The Securities and Exchange Commission’s (SEC) proposal on Climate-Related Disclosures mandates public companies to report climate-related financial data, ensuring greater transparency and investor confidence in sustainability-linked decision-making.

Supportive Frameworks

Robust and stringent regulatory and policy frameworks play a crucial role in providing a supportive environment for advancing green and sustainable financing by incentivising environmentally beneficial investments and reducing greenhouse gas emissions.

The transition to a green economy is regulated by policies that incorporate environmental, social and corporate governance criteria, underscoring the importance of government backing.

A growing number of jurisdictions around the globe have acknowledged the importance of international harmonisation of standards for sustainability disclosures, taxonomies and financial instruments like green bonds and sustainability loans.

ESG integration is another aspect receiving significant emphasis for enhancing transparency and preventing greenwashing. The Sustainable Finance Disclosure Regulation (SFDR) was initiated as a decisive move by the European Union to ensure transparency in the financial investment sector. The SFDR sets out specific criteria for the classification of ESG products, which are crucial for financial market participants to understand and implement correctly.

In addition, the International Sustainability Standards Board (ISSB) is working towards creating global baseline sustainability disclosure standards.

India is also actively supporting its green finance ecosystem by launching various policies like the National Green Hydrogen Mission and Production-Linked Incentive (PLI) schemes for renewable energy to promote renewable energy, electric vehicles (EVs) and sustainable infrastructure.

The Securities and Exchange Board of India (Sebi) has also issued regulations on green bonds and the RBI is focusing on climate-related financial risks.

Getting Everyone on Board

The expansion of sustainable finance has been accompanied by the development of specialised financial instruments and best practices, fostering a comprehensive ecosystem that supports environmentally and socially responsible investments.

This ecosystem comprises diverse stakeholders, including governments and policymakers (for setting conducive regulatory frameworks and policies and providing a roadmap with strategies and action plans), financial institutions like banks and insurance companies (for channelling capital and assessing and managing risks).

It also includes investors (to provide capital for green projects), corporations and businesses (for implementing green projects) and auditing and rating institutions (to ensure transparency).

Finally, it accommodates research and academic institutions, NGOs and civil societies (to provide knowledge and expertise and ensure accountability) and standard-setting bodies (to promote consistency and transparency through standards and guidelines), each playing a critical role in mobilising capital for sustainability-driven initiatives.

Therefore, the green capital landscape for SMEs is mostly governed by dynamic trends in sustainable finance, the integration of ESG principles, stringent regulatory frameworks and policy interventions and, most importantly, strategic collaboration among key stakeholders.

A comprehensive understanding of these elements is crucial for mobilising capital efficiently, accelerating decarbonisation efforts and advancing global sustainability imperatives.