October 13, 2023
- Quick Contact: +91 22 2167 8100
Introduction
In an era marked by pressing environmental and social challenges, the concept of Environmental, Social, and Governance (ESG) has evolved from being a mere buzzword to a global imperative. The need for sustainability, equity, and responsible governance is more apparent than ever. While ESG represents a call to action for the universe, its realization requires a strategic synergy between finance, technology, and government policies. One amongst the significant contributors is the NBFCs falling under the BFSI umbrella.
The NBFC Landscape
Non-Banking Financial Companies (NBFCs) have emerged as a vital cog in the wheel of economic growth and development in India. In recent years, they have also played a pivotal role in contributing to Environmental, Social, and Governance (ESG) objectives. Before delving into the role of NBFCs in ESG, let’s take a brief look at their significance in the Indian financial ecosystem. NBFCs are financial institutions that provide a wide array of banking services, such as loans and advances, acquisition of shares, stocks, and bonds, but do not hold a banking license. Their flexibility and innovative approach have made them indispensable in fulfilling the credit needs of various sectors.
NBFCs and ESG: A Symbiotic Relationship
- Financing ESG Initiatives: One of the primary ways NBFCs contribute to ESG is by financing environmentally friendly projects. Whether it’s funding renewable energy ventures, supporting clean transportation initiatives, or investing in eco-friendly infrastructure, NBFCs are instrumental in channelling capital to ESG-focused projects. According to a report by the KPMG NBFCs have contributed significantly to various sectors, with investments amounting to over thousands of crores in the past five years. NBFCs have significantly contributed more than 10% to GDP as per March 2021[1].
- Tech-Driven Efficiency: The marriage of technology and finance is undeniable in the modern financial landscape. NBFCs, being nimble and adaptable, have embraced technology to enhance efficiency and ensure that ESG projects receive the funding they require promptly. Data from a study by PwC shows that 80% of NBFCs have integrated advanced data analytics and artificial intelligence into their risk assessment processes, enabling them to make more informed decisions when financing ESG projects[2].
- Government and Regulatory Support: Just as NBFCs have benefited from advancements in technology, government and regulatory bodies have recognized the pivotal role they play in driving ESG initiatives. The Reserve Bank of India (RBI) and the government have introduced various incentives and policies to foster ESG investments through NBFCs. RBI’s ‘Priority Sector Lending’ framework now inter-alia includes specific provisions[3] for lending for projects relating to renewable energy, with NBFCs being encouraged to allocate a percentage of their lending portfolios to such projects.
- Parallel to Infrastructure Growth: Much like the housing and infrastructure sectors witnessed rapid expansion due to the infusion of finance and incentivizing schemes, ESG projects require similar support. Just as NBFCs played a key role in the growth of these sectors, they are poised to become the backbone of ESG financing.
The supply of finance to a priority sector has the transformative power to catalyze substantial change. It acts as the lifeblood, infusing essential capital into sectors that are pivotal for a nation’s economic development. This financial infusion can kickstart new projects, accelerate existing initiatives, and create a ripple effect throughout the supply chain. It not only fosters economic growth by generating employment and boosting productivity but also addresses critical challenges such as infrastructure development, healthcare access, and education. By prioritizing sectors with strategic importance, governments and financial institutions can shape the trajectory of a nation’s progress, fostering innovation, resilience, and sustainable development. In essence, the supply of finance to a priority sector serves as the cornerstone upon which societal and economic advancement is built.
The Role of Finance:
The supply of finance to priority sectors has the potential to trigger substantial change. Finance acts as the lifeblood of economic growth, channelling capital into sectors that are pivotal for a nation’s development. Consider the housing sector, which has witnessed remarkable growth in the last two decades. Accessible finance options have made homeownership a reality for many. Similarly, ESG initiatives require substantial capital infusion for research, testing, and scaling of environmentally friendly solutions. Investment and finance industries, including Non-Banking Financial Companies (NBFCs), play a pivotal role in providing the necessary financial support. Incentivized by government policies, they can facilitate the development and deployment of ESG solutions, ultimately driving up ESG rankings.
The Technology Advantage:
Technology and engineering are the key enablers of ESG transformation. Technological innovation allows us to track, measure, and enhance our progress toward ESG goals. Take, for instance, the rapid development of Covid vaccines, a testament to the power of technology and finance subsidized by government initiatives. Just as technology accelerated vaccine creation, it can drive advancements in renewable energy, waste management, and more. However, technological solutions require research, testing, and scaling, which demand significant capital.
Government and Policy Alignment:
To propagate ESG, government policies must align with the goals of sustainability and responsible governance. Policies that incentivize technology and finance companies to invest in ESG initiatives are crucial. Subsidies, tax exemptions, and partnerships with universities can encourage innovation and research in ESG-focused projects. Just as governments have historically supported various industries with schemes and incentives, they should prioritize ESG if they genuinely mean to drive change.
The Global Landscape:
Several countries have already recognized the importance of ESG and have taken steps to incentivize ESG compliance. Initiatives range from tax benefits for renewable energy projects to regulations requiring ESG reporting. For instance, the European Union has introduced comprehensive sustainable finance regulations, while the United States offers tax incentives for clean energy initiatives.
The Path Forward:
If ESG is a genuine priority for governments, the financial sector, technology companies, and universities must be incentivized to lead the way. Governments can provide financial incentives, support research, and create partnerships to foster ESG innovation. Universities and professors can be encouraged through benefits like incubation hubs and patent support. The focus should extend beyond traditional ESG sectors like solar and waste management to find comprehensive solutions that address global challenges.
As the world prioritizes sustainability and ESG principles, NBFCs have stepped up to the plate, assuming a pivotal role in financing projects that align with these values. Their agility, tech-driven approach, and support from the government and regulatory authorities make them ideal partners in the quest for a more sustainable future.
Just as finance played a significant role in propelling the housing and infrastructure sectors to new heights, it is imperative that similar support is extended to ESG initiatives. The collaboration between NBFCs, technology, and government initiatives is set to be the catalyst that propels India toward a more sustainable and environmentally conscious future, making ESG a top priority for the universe.
Conclusion:
The Banking, Financial Services, and Insurance (BFSI) segment, coupled with technology and engineering, can play a transformative role in advancing ESG culture in India and globally. If incentivized and supported by aligned policies, they can drive impactful change. ESG is not just about publishing reports; it’s about nurturing solutions, scaling them, and making them accessible to the world. Just as governments have historically supported industries, they must genuinely support ESG initiatives if they intend to achieve sustainable progress. It’s time for a collective effort to turn ESG into a tangible reality.
In this era of pressing environmental and social challenges, ESG (Environmental, Social, and Governance) considerations have emerged as the need of the hour. To truly address these global imperatives, governments should take proactive measures to incentivize and prioritize ESG compliance among businesses. This involves not only providing financial incentives for ESG-focused initiatives but also fostering an environment conducive to technological innovation. By channelling resources, finance, and support toward ESG, governments can pave the way for the world to achieve collective goals of sustainability, equity, and responsible governance. Technology plays a pivotal role as the enabler, allowing us to track, measure, and enhance our progress toward these objectives. Embracing ESG, incentivizing its adoption, and investing in technology are the essential steps on the roadmap toward a more harmonious and sustainable future for the entire universe.
[1] https://assets.kpmg.com/content/dam/kpmg/in/pdf/2022/11/role-of-nbfcs-and-hfcs-in-driving-sustainable-gdp-growth-in-india.pdf
[2] https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/publications/next-gen-microfinance-the-role-of-digital-technology.pdf
[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11959&Mode=0#Renewable_Energy