Climate finance is not just about combating climate change; it is about driving economic growth while safeguarding this growth and our planet for future generations. Concerted efforts to align financial flows with sustainability from domestic, international, private and government sources have never been more critical.
How much is needed? Estimates vary but a reasonable consensus is that India needs a staggering $2.5 trillion by 2030 to meet Paris Agreement targets, and even more, more than $10 trillion by 2070 for net-zero. Currently, India has mobilised about $390 billion, primarily from domestic sources, which is impressive but far from enough.
Where will this money come from? India is fully justified in making the case for large scale financing from historically high emitter nations, as it is the cumulative effect of historical emissions that caused the climate change problem. Even though this argument has much justification from a climate justice perspective, the political economy just does not currently exist for anything substantive to come through. India itself is going to have to raise the bulk of this money.
The growth in climate finance has been promising, hitting an annual flow of $44 billion by 2020, mostly for energy and mitigation. Domestic sources like commercial banks and investors are the main contributors, supported by government budgets. Domestic private finance contributed $22 billion, 59% of the nation’s green finance in FY 2019 and 2020 – which is great but points to a need to significantly increase public sector funding.
International contributions are also on the rise, with funding from multilateral development banks increasing from $2 billion in 2015 to $3.5 billion by 2022.
However, India’s climate finance needs will be several times the current levels, particularly in sectors beyond energy like agriculture, water, industrial efficiency, freight, and infrastructure. In addition to conducive government policy, climate considerations need to be integrated into financial decision-making to all levels of the financial system. At the macroeconomic level, India needs to prioritize climate-friendly fiscal policies that incentivize low-carbon investments while reducing dependence on fossil fuels. Directing public finance towards energy and climate adaptation can catalyze private sector participation and drive sustainable economic growth. A green tinge to infrastructure projects and flagship government rural employment and livelihoods schemes will accelerate climate action and provide last-mile support.
Mainstreaming climate risk assessment and disclosure within the banking sector is crucial for identifying and managing climate-related financial risks. Regulators have an essential role here. Securities and Exchange Board of India’s Business Responsibility and Sustainability Reporting that mandates the top 1000 listed companies to provide quantifiable ESG metrics will embed sustainability into investment decision-making and hopefully drive new and more funds. The draft disclosure framework on climate related financial risks released by the Reserve Bank of India is a great first step. Public sector lenders will face the greatest pressures by these, and this is a good thing in the long run.
Part of the challenge is the higher costs and current lower returns through green investments. In virtually every sector, the returns will increase, and this is what investors should keep as their North Star.
Achieving India’s climate finance targets necessitates a strong policy framework that encourages investments in green initiatives, and demand triggers for this such as financial incentives like tax breaks and subsidies.
Balancing mitigation and adaptation for India is also crucial given increasing climate impacts. Current financial flows remain heavily skewed towards mitigation, neglecting India’s pressing adaptation needs, with only about 10% of climate finance directed towards adaptation efforts. This exacerbates the vulnerability of communities already facing the brunt of climate change. Given the relatively lower returns here, it is likely that concessional financing will need to be directed towards mitigation to catalyse larger finance flows.
India, as an emerging economy and a growing (even if not a historically major) emitter of greenhouse gases should leverage international cooperation. Through partnership with international funders and private investors, India can access incremental climate finance and technology transfer. Multilateral development banks and bilateral development organisations can absorb risk and foster confidence to catalyse larger private sector investments.
In conclusion, we must think beyond the niche of green finance, to how to make all finance green such that sustainability-driven investments are prioritised. Accelerating climate finance in India will happen when investors realise that returns will come from both performance and planet. Investors who do not will miss out on the economic opportunity of the century.
