The framework defines the following key terms:
- green depositsInterest-bearing deposits received by real estate investors for a specified period which will be earmarked for green financing.
- Green financinglending and/or investing in activities and projects that meet specific requirements (as described more specifically later) that contribute to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives – including biodiversity management nature-based solutions; And
- greenwashing: the practice of marketing products/services as green, when in reality they do not meet the requirements to be defined as green activities/projects.
Name, interest rates and term of deposits
Under this framework, regulated entities are allowed to issue green deposits as cumulative/non-cumulative deposits. The depositor may renew or withdraw the green deposits upon maturity. These deposits must be denominated in Indian Rupees. However, the term, size, interest rate and other terms and conditions relating to green deposits (as applicable to the regulated entity) will be governed by the Master Directive – Reserve Bank of India (Deposit Rate), 2016 dated 3rd March 2016, Master Directive – Admission of Non Bank Financial Corporations For General Deposits (Reserve Bank) Directive, 2016 dated August 25, 2016 and Key Directive – Non Bank Financial Company – Housing Finance Company (Reserve Bank) Directive, 2021 dated February 17, 2021.
The framework approved by the Board of Directors
- Comprehensive policy approved by the Board of Directors: Regulated entities are required to formulate a comprehensive policy approved by the Board of Directors on green deposits. The policy should specify (in detail) all the conditions relating to the issuance and allocation of green deposits. A publicly available copy of this policy must be shared on the website of the regulated entity.
- Funding framework approved by the Board of DirectorsRegulated entities must also prepare a financing framework approved by the Board of Directors (“bf”) to ensure optimal allocation of green sediment. Your BFF must cover:
- Projects/activities eligible for green deposit allocation;
- The process of project evaluation and selection by the lending/investment organizing entity within the eligible categories under the Framework;
- Allocation of proceeds from green deposits along with its reporting, third party verification/confirmation of such allocation and impact assessment (as described more specifically later);
- Details of temporary allocation of green deposit proceeds, only in liquid instruments for a maximum period of one year, from green deposit proceeds when awaiting their allocation in a qualifying project/activity.
- A publicly available copy of the BFF must be shared on the organizing entity’s website. Furthermore, the regulated entity shall ensure that the BFF is audited externally and that the auditor’s opinion is available on its website prior to carrying out the BFF.
List of eligible projects/activities
- Eligible projectsUntil completion of the official Indian green rating, the regulated entities are required to allocate proceeds from green deposits in the following sectors 1:
- Ineligible projectsThe following projects/activities will not be eligible for investment through green deposit proceeds as follows:
- projects with basic energy based on fossil fuels and projects involving new or existing extraction, production and distribution of fossil fuels with their improvement or upgrade;
- Nuclear power generation projects.
- direct waste incineration projects/activities;
- industries related to alcohol, weapons, tobacco, toys or palm oil;
- projects to generate renewable energy from biomass using feedstocks originating from protected areas;
- landfill projects; And
- Projects involving hydroelectric power plants larger than 25 megawatts.
Third party verification/confirmation and impact assessment
The framework mandates the regulated entities to conduct an independent third party verification/assurance on an annual basis for the allocation of proceeds raised through green deposits during the fiscal year. However, such an assessment would not cause the regulated entity to escape from its obligation in respect of the end use of the funds, for which internal checks and balances should be followed as provided for other loans. The requirements mentioned regarding the BFF and the list of eligible projects/activities will act as additional checkpoints while determining the end use of the funds.
The following aspects must be covered in the report for verification/confirmation by a third party:
- Use the proceeds collected from green deposits to be used in accordance with the eligible projects/activities as set out in Paragraph 5 (List of Eligible Projects/Activities). Further, the regulated entities must monitor the end use of the funds allocated to the deposits raised; And
- Internal policies and controls that include management of proceeds collected from green deposits, project evaluation and selection, verification of sustainability information provided by the borrower to regulated entities and reporting as well as disclosures.
Regulated entities are required to conduct an annual external assessment of the impact associated with funds invested in green finance activities/projects through an impact assessment report. If the regulated entities fail to determine the impact of their investments, they must disclose the reasons and difficulties encountered and provide a time-bound future plan to address the same. This assessment will be optional for fiscal year 2023-24 but will become mandatory from fiscal year 2024-25 onwards.
Reporting and disclosures
The regulated entities will be required to appear before their board of directors within 3 (three) months from the end of the financial year which must cover, among others, the following particulars:
- the amount collected from green deposits in the previous fiscal year;
- A list of green projects/activities for which green deposit proceeds have been allocated, along with brief details of the projects;
- Amounts earmarked for eligible green activities/projects; And
- A copy of the third party verification/confirmation report and impact assessment report.
Regulated entities must make appropriate disclosures in their annual financial statements about portfolio-level information regarding the use of green deposit funds.
The Reserve Bank of India (RBI) has recognized that banks and financial institutions have a major role to play in achieving sustainable development. The framework comes at the right time when concerns have been raised around the world about environmental degradation and companies are beginning to shift towards environmentally friendly policies.
The framework embraces a three-line defense model for validating the use of green deposits, through: (a) a board- and BFF-approved policy that will ensure that the management of regulated entities informs itself of potential climate-related financial risks and defines the process for appraisal and selection of projects for investment, (b) Carry out external verification/assurance and impact assessments that will ensure independent assessment of climate-related risks, and (c) carry out regular reviews of the internal control framework which is ensured by reporting and disclosure requirements in regulated entities. Strict compliance with these conditions will be necessary to avoid any scope for greenwashing especially when the official green rating has not yet been notified.
Overall, the framework is a step in the right direction and will surely motivate banks and financial institutions in India to increase green finance portfolios by engaging and supporting stakeholders looking to invest in sustainable projects.