By Ritaj Kalaskar and Sagar Asapur
The government of India estimates a financial requirement of around US$ 2.5 trillion by 2030 to meet its climate goals, as per its Nationally Determined Contributions (NDCs). Mobilizing such a significant quantum of finance will not be easy, but is essential to India’s adaptation and mitigation efforts. To achieve this goal, tapping into domestic savings, through innovative approaches to mobilize resources for climate action becomes imperative.
One such initiative is the Green Deposit Scheme introduced by the Reserve Bank of India (RBI) in June 2023. These are fixed deposits earmarked for green projects and activities that contribute to climate risk mitigation, adaptation and resilience, and environmental objectives. The Green Deposit framework aims to encourage regulated entities (REs) to offer customers a secure investment vehicle that protects their savings while also assisting India’s sustainability agenda and increasing the flow of credit to green activities/projects. As of April 2024, at least ten different REs, including State Bank of India, Bank of Baroda, Canara Bank, and Central Bank of India (public), Indusind Bank, HDFC Bank, and South Indian Bank (private), AU Small Finance Bank (small finance), and HSBC (foreign), and a Non-Banking Financial Company, Can Fin Homes Ltd, offer green deposits schemes with interest rates comparable or even exceeding those of fixed deposits.
The RBI’s efforts to promote green deposits is laudable, but the framework suffers from multiple shortcomings that undermine its effectiveness and credibility. Firstly, there is an absence of a clear Indian green taxonomy, without which the eligibility criteria remain broad and vague. Secondly, the interim measures rely on the Framework for Sovereign Green Bonds (SGrB); other than a broad description of sectors, it lacks sector-specific indicators, targets, and standards of measurement. Thirdly, disclosures by the banks are incomplete and inadequate, making it difficult for depositors to assess the actual environmental impact of their investments. These issues raise concerns that green deposits may become a mere subsection of fixed deposits, rather than a distinct product driving sustainable finance.
The primary challenge with the green deposits framework is the lack of an established Indian green taxonomy. Establishing a green taxonomy is essential not only to define what constitutes “green” but also to enhance transparency, prevent greenwashing and empower financial institutions and banks to accelerate sustainable investments based on environmental criteria. However, no significant progress has been made since the initial announcement made by the Department of Economic Affairs, Ministry of Finance in 2022, and the delay is, frankly, baffling.
The second challenge arises from the interim adoption of the Framework for SGrB to determine the eligibility of projects based on their classification into one of the nine sectors. These sectors include renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, pollution prevention and control, green buildings, sustainable management of living natural resources, and biodiversity conservation. Each of these lacks sector-specific indicators, targets and standards of measurement. For example, one of the descriptions of the renewable energy sector is simply mentioned as “incentivizing adoption of renewable energy,” which is vague, and uncertain and leaves the reader with multiple questions.
Moreover, the exclusions provided in the SGrB framework address some environmental risks but fail to mitigate greenwashing risks and environmental concerns associated with sectors like energy efficiency and green buildings. For instance, it does not account for the nuances and differences between the various green building certification standards like Green Rating for Integrated Habitat Assessment (GRIHA), Indian Green Building Council (IGBC), Energy Conservation Building Code (ECBC) and Leadership in Energy and Environmental Design (LEED), which offer multiple levels of certification. This oversight can allow developers to meet minimum criteria rather than higher standards. Additionally, the framework lacks emphasis on sustainability in supply chains, especially in hard-to-abate sectors like cement and steel, limiting its ability to drive comprehensive sustainability in the built environment.
The third issue identified with the green deposits framework is the lack of transparency and adherence to disclosure requirements by banks. Among the nine banks offering green deposit schemes, only five banks disclose a board-approved policy and Financing Framework (FF), two banks provide details of the external review, which is an evaluation of their FF with comments to address any gaps or risks, and three banks disclose Third Party Assurance, while the Impact Assessment is mandatory from FY 2024-25.
None of the banks reveal information about the borrowers of green deposit proceeds or specific projects falling under the eligible list. For instance, one bank has shared a sample list of green products which include activities under existing government schemes, raising concerns about double counting and conveniently bypassing robust project evaluation and tailored impact assessment indicators. This inadequate disclosure and risk identification hinder depositors’ ability to evaluate the true environmental impact of their investments, undermining the transparency and credibility of the green deposits product.
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Furthermore, the board-approved policy and FF mimic RBI’s directives but lack customization, missing sub-sector classification, detailed Key Performance Indicators (KPIs), and comprehensive environmental assessments for sectors or projects. Exclusions are directly replicated from RBI’s notifications instead of refining the descriptions, enhancing the list of exclusions and developing robust project-specific indicators. Moreover, there is inconsistency in the involvement of existing Environmental, Social, and Governance (ESG) Teams among banks.
Interestingly, one bank’s green deposit policy mentions opportunities for green investment in the highly polluting oil and gas sector, raising questions of legitimacy and greenwashing. The pooling of green deposit proceeds varies among banks: some maintain a separate green portfolio, while others earmark funds for green investments. Some banks offer external review on their green deposit policies, seemingly as a formality without meaningful feedback.
Similarly, some banks provide limited Third Party Assurance, lacking crucial details on project selection and fund usage. Notably, the RBI has not enforced any penalties for non-compliance or partial compliance with these guidelines. These inconsistencies in governance structures and operational practices across banks threaten the coherence, transparency, and impact of the green deposit framework, essential for driving meaningful sustainable finance in the banking sector.
In conclusion, while the conceptual introduction of green deposit schemes by several banks marks a positive step towards sustainable finance in India, significant hurdles remain in ensuring their effectiveness and credibility. A well-defined Indian green taxonomy, permanent and well-designed frameworks, and enforcement of sound transparency and disclosure practices is imperative to prevent greenwashing and drive meaningful sustainable investments.
The RBI must prioritize standardization and robust governance structures within banks to ensure the coherence and impact of their green deposit frameworks. Without these fundamental improvements, green deposits risk being lost in the shadows cast by conventional fixed deposits rather than serving as a catalyst for sustainable development in the banking sector. These improvements are essential to realizing the full potential of green deposits as a trusted and impactful sustainable finance instrument, driving India’s transition towards a climate-resilient and low-carbon economy.
(The authors are researchers at the think tank Climate Risk Horizons. Views expressed are the authors’ own and not necessarily those of financialexpress.com.)