MSMEs Need Credit Guarantee For Green Bonds To Adopt Green Tech: Experts

Terming Securities and Exchange Board of India (Sebi's) investor assurance measures to sustain investments in green projects, experts have said that Indian micro, small and medium enterprises (MSMEs) need support through credit guarantees for green bonds to adopt green technologies.

The TERI Expert Group on Financing India’s Long-Term Low Carbon Development Strategies (LT-LCDS) convened a roundtable, hosted in association with the World Trade Center Mumbai, and the All India Association of Industries (AIAI), which highlighted the need for policy alignment and innovative financing mechanisms to address the financing challenges critical to enabling India’s transition to a low-carbon economy.

Pramod Rao, Executive Director, Sebi informed about the measures taken by the market regulator to safeguard investors and promote investment in genuine de-carbonisation projects. He said that Sebi has implemented the sustainability disclosure norm Business Responsibility and Sustainability Report (BRSR) Core on top 150 listed companies from September this year. 

"Under BRSR Core, corporate disclosure is assessed by third parties as against BRSR where disclosure is based on self-declaration. We have mandated mutual funds to invest at least 65 per cent of the capital raised under their ESG fund schemes on companies complying with BRSR Core. India is the first country to regulate ESG rating providers. There are 10-12 registered ESG rating providers in the country and they have to publish three reports based on BRSR Core.”

Rao pointed out that Sebi has been taking these investor assurance measures to promote investor confidence and to sustain the flow of funds into genuine decarbonisation projects. He said, “In recent years, we are seeing a strong inflow of funds from retail investors as reflected in high monthly inflows into mutual fund SIP schemes, increase in F&O trading and bullish trend in the SME IPO market. The monthly inflow from mutual fund SIP schemes has grown from Rs 23,000 crore/ month in ten years to Rs 65 lakh crore in recent months. We need to sustain this inflow by building investor confidence through the above investor assurance measures.”

Rao informed that the country has created a market for green bonds since 2017 and now we have expanded the eligible list of green projects covered under this bond to include renewable and sustainable energy, sustainable waste management, biodiversity conservation, pollution control and prevention, to name a few. "We have also introduced other funding instruments such as blue bonds (water management projects), yellow bonds (solar power projects) and transition bonds.”

Rao highlighted three areas of concern in promoting investment in de-carbonisation projects and aligning the long-term funding requirement to our Nationally Determined Commitments (NDC) targets. He said, “There is no greenium or lower cost of capital for green projects in India, unlike in foreign markets where Indian companies can issue green bonds at a lower cost. In foreign markets, there are dedicated investment funds with a mandate to invest in green projects and hence companies can raise funds at lower cost (or benefit from greenium in foreign markets). In India, there is no mandate on insurance companies or long-term pension funds to invest in green projects or ESG-linked projects.”

Another concern highlighted by Rao was is ‘greenwashing’, where borrowers raise funds by making false claims to investors about the environmental sustainability or ESG credentials of the project. He pointed out, “The increasing instance of ‘greenwashing’ leads to ‘green hushing’ where even genuine borrowers choose to under-report the green credentials of the project fearing allegations of ‘greenwashing'

Vijay Kalantri, Chairman, World Trade Center, Mumbai, Board Director, World Trade Centers Association, New York; and President, AIAI, emphasized, “Indian MSMEs need Rs. 17,000 crore to adopt energy saving technologies and Rs. 72,000 crore to invest on rooftop solar power. Government and financial institutions may support MSMEs in addressing this funding gap by earmarking dedicated funds for the energy transition of the MSME sector. MSMEs also need interest subvention on loans for green energy projects.”

Kalantri further suggested that Indian MSMEs are unable to raise green bonds from foreign markets due to poor credit ratings. We need government support through credit enhancement and credit guarantees to enable MSMEs to raise green bonds at reasonable interest rates.

RR Rashmi, Distinguished Fellow, TERI suggested that MSMEs should adopt low-cost methods to reduce carbon emissions. These low-cost methods are the deployment of energy-efficient technologies and practices, adoption of circular economy practices and electrification (use of electric machines and vehicles powered by electricity rather than petrol or diesel.

Rashmi further informed, “Government of India is preparing sectoral energy transition roadmap as part of its Low Emission Development Strategy. Specifically, the government is working on introducing energy intensity reduction targets for around nine sectors covered under the Energy Conservation Act. Once these targets are introduced, it will pave the way for indirect carbon pricing and development of active carbon trading market in the country.”

Mahesh Date, Secretary, Indian Institute of Foundrymen, Western Region and Vice President, Ichaalkaranji Engineering Association shared his views on the adoption of green technologies by the foundry industry in Kolhapur. He informed, “Kolhapur Foundry has successfully set up a sand recycling plant to minimize wastage of sand and promote efficient use of sand in foundry units. We need government support for such eco-friendly projects in the MSME sector. The central and state Governments may support MSME units with capital subsidy or viability gap funding for effluent treatment plants, establishing common facility centres, waste recycling and energy conservation projects.”

Chetankumar Sangole, Former Head, Sustainability Desk, Mahratta Chamber of Commerce, Industries and Agriculture suggested four synergistic ways to address the financing gap of the MSME sector for adopting green technologies. He said, “One of the ways is to set up special purpose vehicles, with a joint venture between industry and government to pool investible capital for sustainable projects of MSMEs. Other three synergistic ways are the adoption of a cluster-based financing approach, supply chain linked market model and regulatory and policy package."

Sangole added that under the regulatory and policy package, the government may introduce green taxonomy, green public procurement norms, priority sector lending for green projects, encouraging ESG-linked financing by banks & NBFCs, promoting digitization, introducing targets for de-carbonisation and monitoring compliance.