The Landscape of Green Finance in India tracks flows to real economy sectors—clean energy, clean transportation, and energy efficiency—as well as to some adaptation sectors. The study considers both public and […]
Since its popularization in the 1960s, passive investing has become the primary strategy for private and institutional investors worldwide. Many have abandoned active stock picking due to the challenge of consistently outperforming the market and the high costs associated with active management. Passive investing offers reduced risks and fees, diversification benefits, and attractive long-term returns. However, it has drawbacks. Passive investors, who construct their portfolios to track benchmark indexes like the S&P 500 or NIFTY 500, often neglect risks and opportunities such as climate change. This oversight can lead financial markets toward a state of autopilot, ignoring significant environmental concerns.
India’s housing sector stands at a pivotal crossroads for climate action. Accounting for over 20% of the nation’s greenhouse gas emissions, primarily from electricity use, industry faces escalating demands exacerbated by urbanization and rising temperatures. Despite the apparent environmental imperative, scaling green housing remains challenging. High upfront costs deter widespread adoption, compounded by limited financial incentives and loan accessibility. Yet, the potential benefits—lower energy bills, enhanced asset value, and reduced carbon footprints—underscore green housing’s viability. With strategic policy interventions and financial sector alignment, India can harness this opportunity to catalyze a sustainable housing revolution, driving economic growth and environmental stewardship.
Greenwashing involves false or misleading claims to portray a company, product, or service as environmentally responsible. This practice deceives consumers and investors into believing the firm is committed to sustainability, while the reality may differ. As the importance of sustainability grows among the public and investors, greenwashing has become a significant concern, particularly in the finance sector. The rise of ESG investing has increased pressure on financial institutions to support sustainable practices. Yet, it has also enabled some to falsely present themselves as environmentally conscious to attract investors.
As appreciation of the urgency of climate change grows, several innovative financial instruments have been developed and deployed to raise capital for action, including green bonds, transition bonds, and sustainability-linked bonds (SLBs). However, confusion remains about the basic concepts of these instruments and the differences between them. This piece focuses on demystifying two such instruments: sustainability-linked bonds (SLBs) and transition bonds.
Climate change, now a major financial concern, impacts investment and lending decisions through physical and transition risks. Banks face significant physical risks affecting their assets and loan portfolios, while institutional investors and insurance companies must manage both risk types. Equity investors should prioritize transition risks due to potential policy changes. Ignoring climate risks is not viable; investors must integrate climate considerations to safeguard portfolios and drive positive change in business practices.
ESG funds blend financial analysis with environmental, social, and governance considerations, seeking sustainable and ethical investments. Environmental metrics include greenhouse gas emissions, energy use, waste, pollution, resource conservation, and animal welfare. Social factors gauge relationships with employees, suppliers, customers, and communities. Governance aspects encompass leadership, compensation, transparency, controls, and shareholder rights. Investors favor ESG funds for potential long-term gains and reduced risk. Originating from early 20th-century social investment movements, ESG investing surged in the 2000s, catalyzed by initiatives like the UN PRI and the Paris Agreement. By 2023, ESG funds managed over $30 trillion globally. In India, with only nine ESG funds totaling $1.3 billion, growth is hindered by limited awareness, performance concerns, and reporting standards gaps.
Climate scenario analysis, a strategic planning tool, is gaining traction for its utility in examining potential future scenarios and assessing the resilience of an organization’s business strategies against various climate-related risks. Businesses, financial institutions, and regulators need to adopt a progressive approach to integrate scenario analysis into strategic planning practices.
Climate stress tests are rapidly gaining traction to assess whether financial institutions and systems can withstand severe climate-related risks. Many regulators globally are employing such tests. The Bank of England was the first to initiate climate stress tests, for insurance companies in 2019 and for banks in 2021. Regulatory authorities in Australia, Canada, the EU, France, Hong Kong, and Singapore have since followed suit.
Climate indices are specialized stock market indices designed for passive investors seeking to invest in companies that incorporate climate change considerations into their business strategies. These indices serve as benchmarks for integrating climate change into securities selection, portfolio construction, and risk management.