By Neetu Chitkara and Vivek Adhia
Each year, as major climate negotiations like COP29 in Baku approach, a wave of announcements, programmes, and partnerships aims to boost global climate action. Mobilising climate finance and addressing resource gaps have dominated discussions in recent years. However, action in the green finance space still lags behind energy transitions and industrial decarbonisation, where more progress has been made. This delay may stem from misconceptions or a lack of understanding among key players. Recent reports and surveys highlight widespread misperceptions about the urgency of green finance, sector prioritisation, low returns, and its perceived limited impact.
In an era where climate change is a global priority, green finance is crucial for a sustainable future. This article seeks to address these misconceptions and highlight the urgent need for green finance.
Green Finance is a Future Goal, Not a Present Need
Contrary to the belief that green finance is a distant objective, the need for climate transition financing is immediate and critical. Estimates indicate that between $100-150 trillion will be required from 2020 to 2050, with the bulk of this financing needed within the first 15 years, peaking around 2030. Financial institutions must mobilize resources now to support this transition.
Recent natural disasters underscore the urgency. In 2023, India experienced devastating floods in Himachal Pradesh and Uttarakhand, resulting in over 300 deaths and causing economic losses exceeding $10 billion. In 2024, the Delhi heatwave and the Wayanad landslides only underscore the point further on how climate change is already starting to be experienced. These events highlight the immediate and tangible impacts of climate change, demonstrating the necessity for substantial and swift investments in green finance.
Green Finance is Irrelevant in the Grand Scheme of Things
Another prevalent misconception is that green finance represents a minor, insignificant part of the global economy. In reality, it is poised to become a substantial segment of financial markets. Climate transition financing is projected to constitute nearly half of the total global financing needs by 2050. Investments in green technologies and renewable energy are not only environmentally beneficial but also present significant economic opportunities.
A pertinent example in Indian context is State Bank of India (SBI), which has committed to ensuring that 7.5% of its total loan book will be green by 2030. As the largest bank in India, SBI’s commitment reflects the substantial scale and importance of green finance in the broader financial landscape.
Minimal Efforts and Rhetoric are Sufficient
There is a belief that merely speaking about sustainability and making minimal efforts suffice to meet regulatory requirements and market expectations. However, the need of the hour is to go beyond mere reports or compliance and to genuinely embed thinking on climate within the decision making process within the organization. Regulators and various bodies are increasingly vigilant about greenwashing—superficial or misleading claims about environmental practices. Authentic progress requires comprehensive strategies, transparent reporting, and genuine commitment.
In 2022, a leading European bank faced significant backlash and regulatory scrutiny after it was revealed that its claims about sustainable investments were exaggerated. This incident led to stricter regulations and highlighted the necessity for verifiable green finance practices.
Way ahead
The environmental and economic advantages of green finance are substantial. It plays a vital role in reducing carbon emissions, supporting the shift to renewable energy, and promoting sustainable development. In addition to its environmental benefits, green finance drives economic growth by creating jobs in emerging green industries and encouraging innovation.
However, despite these advantages, green finance faces a number of challenges. Regulatory barriers and inconsistent policies across different regions can hinder progress. There is also ongoing scepticism regarding the profitability of green investments, although growing evidence suggests that sustainable investments can deliver competitive returns. Furthermore, accurately measuring and reporting the impact of green finance remains complex, yet it is crucial for demonstrating its effectiveness.
By fully embracing green finance with genuine commitment, robust strategies, and transparent practices, we can pave the way for a sustainable and prosperous future. This will undoubtedly require a concerted effort from financial institutions as they embark on this journey, recognising that climate risks can present new financing opportunities – something that leaders in the field are already starting to experience.
Call to Action for Management and Boards of Financial Institutions
Start with a comprehensive ESG strategy: Financial Institutions must establish clear ambitions and goals that extend beyond mere regulatory or compliance requirements. These goals should be deeply integrated into the business strategy, ensuring that environmental, social, and governance (ESG) considerations are at the heart of decision-making processes.
Assess the Balance Sheet for Green Opportunities: Conduct a detailed evaluation of the assets and liabilities, to identify and prioritize potential areas for growth in green finance. Opportunities span various sectors, including Corporate, MSME, Agriculture and Retail. Prioritizing these areas in alignment with the institution’s overarching strategy will help focus resources on the most impactful opportunities.
Implement a Comprehensive Risk Management Framework: As climate risks evolve, Financial Institutions must develop robust mechanisms to assess and manage both physical risks and transition risks. Reserve Bank of India has already laid down it’s expectations through a draft circular and Financial Institutions must ensure that the Risk frameworks should be quantitative and forward-looking, enabling informed decision-making.
Collaborate with Stakeholders: Engagement with external stakeholders - governments, regulators, investors, and communities - is vital for advancing green finance objectives. By working collaboratively, Financial Institutions can help shape policies and practices that support sustainability goals and pave a way to ensure sustainability aligns with profitability.
Invest in capacity building: All this is not possible without building expertise within the organization. This requires training key personnel to understand the nuances and equipping them to educate the broader organization and also its clients on both climate risk and corresponding green finance opportunities. Partnerships with specialized experts in fast-evolving areas of green finance can provide valuable insights and accelerate the institution’s green transition strategy.
In conclusion, green finance is not a distant goal, but an urgent necessity and Financial Institutions have a critical role to play in driving this agenda forward. Now is the time for action - only through concerted, coordinated efforts can we ensure a thriving and sustainable future.
(Neetu Chitkara, Managing Director and Partner, BCG. Vivek Adhia, Associate Director, BCG.)
Views are personal, and do not represent the stand of this publication.
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