Recently, the Reserve Bank of India (RBI) said it is not mandatory for banks and Non-Banking Financial Companies (NBFCs) to raise green deposits.
GS III: Indian Economy
Dimensions of the Article:
- What are green deposits?
- Regulatory Framework for Green Deposits by RBI
- Potential Benefits for Depositors/Investors
- Limitations and Challenges:
What are green deposits?
- Green deposits are not very different from the regular deposits that banks accept from their customers.
- The only major difference is that banks promise to earmark the money that they receive as green deposits towards environment-friendly projects.
- For example, a bank may promise that green deposits will be used towards financing renewable energy projects that fight climate change.
- A bank may also avoid using green deposits to invest in fossil fuel projects that are considered harmful to the climate.
- A green deposit is just one product in a wide array of other financial products such as green bonds, green shares, etc., that help investors put money into environmentally sustainable projects.
Regulatory Framework for Green Deposits by RBI
Conditions for Accepting Green Deposits:
- Banks must establish approved rules or policies for investing green deposits.
- These rules must be publicly available on the banks’ websites.
- Banks need to disclose information about the amount of green deposits received.
- Banks must provide details on how the deposits are allocated to different green projects.
- Banks should report on the environmental impact of their investments.
- Claims made by banks regarding project investments and sustainability credentials must be verified by a third-party.
Sustainable Sectors Eligible for Green Deposits:
- RBI has identified sectors that qualify for green deposits.
- Eligible sectors include renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
- Banks are not allowed to invest green deposits in projects related to fossil fuels, nuclear power, tobacco, gambling, palm oil, and hydropower generation.
Objective of the Rules:
- Prevent greenwashing, which involves misleading claims about environmental impact.
- Ensure that banks do not exaggerate the positive effects of green deposits.
- Avoid investments that are not truly environmentally friendly but marketed as such for higher returns.
Potential Benefits for Depositors/Investors:
- Depositors who care about the environment may find satisfaction in investing their money in environmentally sustainable projects.
- Green deposits can align with the values and beliefs of individuals who prioritize environmental sustainability.
- Investing in green projects can be seen as a way to contribute to environmental preservation and positive change.
Limitations and Challenges:
- The range of projects available for investment through green deposits is limited by design. This restricts the investment options for depositors.
- Critics argue that green investment products may primarily serve as a way to make investors feel good, without necessarily providing significant environmental benefits.
- Assessing the true environmental sustainability of a project can be complex, as it involves considering various second-order effects that may not be immediately apparent.
- It can be difficult for depositors/investors to determine if a project is genuinely environmentally sustainable, given the complexities and potential greenwashing in the industry.
-Source: The Hindu