Why Green Finance is Crucial for Meeting Climate Targets

Introduction

Green finance is playing an essential role in addressing climate change by supporting sustainable projects, particularly for small and medium-sized enterprises (SMEs). With global sustainable finance investments reaching $1.46 trillion in 2022 and surpassing $1.5 trillion in 2023, the sector has demonstrated resilience despite economic uncertainties. As regulatory frameworks evolve and investor interest in environmental, social, and governance (ESG) principles increases, green finance is becoming a key driver in the transition to a low-carbon economy.

The Growth of Green Finance

In 2024, the Green Climate Fund (GCF) approved $686.8 million in financing to mobilize around $1.5 billion for 11 projects spanning 42 countries, benefiting approximately 115 million people. India, aiming to meet its Nationally Determined Contributions (NDCs), requires ₹162.5 trillion by 2030, highlighting the scale of investment needed. The Indian government's introduction of a climate finance taxonomy in the Union Budget 2024-25 aims to provide clear definitions for green investments, aligning them with national sustainability goals and boosting investor confidence.

The Role of ESG Investing

Investor interest in ESG-focused financial instruments has surged, with the ESG investment market valued at $27.48 trillion in 2023 and expected to reach $130.88 trillion by 2032. ESG investors prioritize companies that actively work toward reducing carbon footprints, adopting renewable energy, and implementing sustainable business practices. In India, ESG investments have risen from $330 million in 2019 to $1.3 billion in 2023, prompting regulatory measures to ensure transparency and safeguard investor interests.

Several countries have strengthened ESG regulations. The UK enforces climate-related disclosure regulations, ensuring corporate accountability. The US is shifting toward mandatory ESG reporting, aligning its regulatory approach with the European Union’s. The Securities and Exchange Commission (SEC) has proposed new regulations requiring public companies to disclose climate-related financial risks, enhancing investor trust in sustainability-linked decisions.

Regulatory Support and Policy Interventions

Robust regulatory frameworks play a crucial role in advancing green finance by providing incentives for sustainable investments. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) establishes clear guidelines to prevent greenwashing and ensure financial market participants correctly classify ESG products. Similarly, the International Sustainability Standards Board (ISSB) is developing global sustainability disclosure standards to harmonize ESG reporting across jurisdictions.

India has also introduced key initiatives to promote green finance, including the National Green Hydrogen Mission and the Production-Linked Incentive (PLI) scheme for renewable energy. The Securities and Exchange Board of India (SEBI) has implemented regulations on green bonds, while the Reserve Bank of India (RBI) is focusing on addressing climate-related financial risks.

Building a Sustainable Financial Ecosystem

The expansion of sustainable finance relies on collaboration among various stakeholders. Governments and policymakers set regulatory frameworks, while financial institutions, investors, and businesses play a crucial role in implementing green projects. Standard-setting bodies, research institutions, and civil societies ensure transparency and accountability. This ecosystem is essential for mobilizing capital, accelerating decarbonization, and meeting global sustainability goals.

Conclusion

Green finance has become a fundamental tool for achieving climate targets by mobilizing investments in renewable energy, low-carbon transport, and sustainable infrastructure. As global ESG investments continue to rise, regulatory frameworks and policy interventions are shaping a transparent and reliable green finance ecosystem. Ensuring long-term sustainability requires continued collaboration between governments, financial institutions, businesses, and investors.

Source & Credits

This article is based on industry reports, financial data, and regulatory updates on green finance, ESG investments, and climate policies.