The recent innovations in decarbonization finance are reshaping the flow of capitals into low-carbon technologies, climate resilience, renewable energy, and just transition pathways. The central plan of companies to fund their net zero strategies can be supported through green bonds, carbon/green credits, transition loans, and emerging transition finance tools.  

What Does Decarbonization Finance Mean?

Decarbonization finance means financial instruments and capital flows that directly support the reduction of greenhouse gas emissions, improvement in energy efficiency, scaling of climate solutions and setting up environment friendly technology. It incorporates financing tools such as green bonds, green/carbon credits, sustainability linked loans, or rewards for measurable and verifiable climate innovation technology or solutions. 

There are many players like the multilateral banks, bilateral banks, government authorities, institutional investors, corporates who take part in decarbonization financing, but they are all driven and pushed by existing disclosures, taxonomies, and decarbonization or net zero commitments. This ecosystem aligns well with existing financial portfolios with globally set targets along with managing transition and physical climate-related risks.

Related Read: India’s Power Sector: Turning Targets to Decarbonization Action

As per the Reserve Bank of India, the estimated green finance pool of up to 2.5% of the GDP is required to meet the existing infrastructural gaps due to extreme climate event (NLIU, 2024). According to the Ministry of New and Renewable Energy’s report, India alone requires Rs. 15,000 to Rs. 20,000 crores of annual Foreign Direct Investment in the renewable energy sector. In March, the Securities and Exchange Board of India (SEBI) introduced an ESG category of mutual funds.  

Green Bonds: The Backbone of Climate Capital 

Green bonds are the fixed income assets allocated to environmentally beneficial projects such as renewable energy, clean transport, energy efficiency, green infrastructure, pollution prevention, biodiversity conservation, etc. There are guidelines set by the International Capital Markets Association for project planning, implementing, evaluation, and reporting. To ensure transparency and strengthen reliability in the bond utilization by issuers, incorporating impact reporting and third-party reviewers/certifiers can be beneficial.   

The other bond categories by SEBI includes ‘blue bonds’ for oceans and water sustainability, ‘yellow bonds’ for solar energy, and ‘transition bonds’ for hard to abate sectors, to align India’s commitment with global best practices. Sustainable bonds highlight the existing benefits that various green and social projects offer to companies aiming for transition. 

ESG and Sustainability- Linked Debt 

The sustainability debt landscape includes ESG labelled bonds and performance linked incentives.  Social and sustainability bonds finance social and environmental projects, like affordable housing, health, water, cleanliness, and low-carbon infrastructure.

Related Read: Disclosure to Impact: Transforming Sustainability Report into a Powerful Communication Engine

Sustainability-linked bonds/loans provide capital to achieve predefined sustainability performance targets, with Key Performance Indicators (KPIs) like GHG intensity reduction, renewable energy, or improved ESG ratings.

The borrowers and lenders agree on KPIs and adjust their performance accordingly. Missing or exceeding the set targets can trigger penalties, legal complications or even financial losses. The aim is declaration of bond characteristics, reporting on targets, and third-party verification of bond achievement. 

Monetize Emission Reduction Through Green Credits or Carbon Credits 

Green credits are rewards offered to organizations making positive impact on the environment through various eco-friendly initiatives. These credits are authentic and undergo rigorous validation, verification and certification processes by accredited third party organizations. They assist companies to disclose their carbon emissions and green credits generated ensuring accountability, and transparency. With these credits, companies can claim various environment benefits from initiatives such as afforestation, forest conservation, resource conservation, water or waste reduction, renewable energy deployment, or setting up emission capture technology at source. 

In India, green credits scheme was launched on October 12, 2023, under the Environment Protection Act, 1986. They act as a bridge between net zero goals and set emissions reduction targets. The aim is to allow businesses to accountably reduce their residual emissions and take responsibility of their actions. The credits are issued after proper evaluation, monitoring, verification and third‑party assurance. They are tradable on a registry platform, enabling companies to purchase them and use towards defined environmental goals.  

How does Transition Finance Funding Hard-to-Abate Sectors work?

High emission intensive sectors such as cement, chemicals, heavy transport, and steel are hard-to abate and require large scale, long-term capital and along with other associated risks. This drives the rise of transition finance as an important part of company’s transition.

Related Read: Sailing Toward Sustainability: A Deep Dive into Maritime Sector Decarbonisation Efforts

The Glasgow Financial Alliance for Net Zero defines ‘transition finance as an investment, financing, insurance or service-related fund to support a whole transition to Net zero by developing and scaling climate solutions, aligned pathways, and accelerated managed phase-out of high emitting physical assets’. The outcome depends on set timebound, sciencealigned transition plans, accountable interim goals, investment roadmaps, governance structure and globally aligned disclosures. 

The journey to decarbonization is no longer a niche it is vital for various funding decisions, stakeholder relations, market competitiveness, customer trust and attraction. Companies aligning well with the transitional plans can reduce the potential future risks, access new pools of green capital, strengthen stakeholder trust, and improve the market presence.  

Identified Steps for Channelized Implication of Decarbonizing Funds

  1. Map company’s Capex and Opex needs by achieving the SBTi targets and net zero commitments and aligning them with appropriate instruments such as carbon bonds, transition loans, and green credits. 
  2. Establish appropriate GHG inventories to support KPIs based financing and impact reporting as required by many investors, stakeholders, and customers.   
  3. Build a tailored decarbonization plan for achieving net zero commitments and proactively engaging with ever evolving regulatory frameworks such as SEBI, IFRS S2, disclosures to avoid any misalignments, or legal obligations. 
  4. Buy green/carbon credits from authentic, reliable and verified sources only to reduce residual emissions from the atmosphere with transparent disclosure requirements and prioritizing emissions reduction goals.  

Conclusion 

SEBI’s revised circular on green debt securities aligns with global green finance guidelines. The target is to improve foreign environmental, social, and governance investors’ interest and trust in domestic green debt issuance. It intends to appoint an independent third-party reviewer for both pre and post green bond issuance compliance. The circular will support in avoiding occurrence of instances of green washing, which must be followed by all green debt issuers.  

Today, various national and international banks offer green loans to businesses investing in sustainable/green projects. Venture capital firms and other private equity investors actively fund startups and companies in early business stages focusing on sustainability, reducing the negative impacts on social and environmental factors. Private companies invest in sustainability/green projects as they have long-term returns and positive environment and social impacts.  

In March, the Securities and Exchange Board of India (SEBI) introduced an ESG category of mutual funds where all the asset management companies in India can launch more than one ESG fund, and as reporting on such parameters improves, the increased transparency will boost stakeholders’ confidence and trust. 

Why Choose Ascentium?

Ascentium is a premier choice for decarbonization finance advisory due to its specialized expertise in the field of green bonds, sustainability-linked loans, and carbon or green credit projects tailored especially for Indian corporates navigating SEBI regulations and global standards.  

It delivers end-to-end solutions from data collection, setting boundary, preparing GHG inventory, emission calculation, emission reduction initiatives, providing tailored decarbonization roadmaps, and policy-aligned strategies. At Ascentium, we transform complex climate finance into actionable strategies that drive emission reductions, improve ESG ratings, and deliver measurable ROI on sustainability investments.  

Authored by:

Shreyash Khadse | ESG and Sustainability

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