Building a green finance market for India
It should grab the opportunity by mobilizing capital, creating incentives for a low-carbon transition and consolidating knowledge, as financial centres like London and Luxembourg are doing..
Record-setting heat is creating problems all over Europe. Deadly forest fires have swept across Greece, Germany, Holland, Latvia, Norway, Poland and Sweden. Many countries are still on heat alerts. Outdoor barbecues have been banned. In Finland, fields that had been lush green this time of year for the past 30 years have turned brown. Losses this summer are expected to cost the Danish farming industry almost $1 billion and its agriculture sector, billions more.
This sounds like déjà vu. Every year, Europe seems to simmer more than the previous one. But this story isn’t unique to Europe. Climate change is affecting everyone. Houses in Bengaluru were built without air conditioners in my college days. Today, March and April are difficult to get through without some form of cooling.
Financing mitigation
Europe has traditionally led the charge on mitigation efforts and global cooperation, and estimates indicate that it would need €180 billion in investments every year to meet the Paris Agreement pledge of limiting global warming to below 2 degrees Celsius. The World Economic Forum projects that $5 trillion per year will be needed until 2030 in green infrastructure, much of which will be in the developing world.
Climate mitigation in India is rightly ensconced in its economic development. The country needs about $4.5 trillion in infrastructure funding by 2040. Of this, $125 billion will be required to meet India’s national renewable energy targets of 2022, $667 billion for electric vehicles and almost $1 trillion for affordable green housing. But these aren’t India’s only growth areas as far as green is concerned. Energy efficiency has huge potential: Housing alone comprises 35% of the market and agricultural pumpsets 18% (including consuming 85% of all available freshwater resources). Waste management, climate-resilient cities, land use practices, afforestation and reforestation, green buildings and air pollution are all areas that need to be financed. The Union ministry of agriculture estimates an additional foodgrain need of 70 million tons for the next 10 years due to lower productivity from climate-induced changes in weather.
Yet, the problem is not money. The Organization for Economic Co-operation and Development’s pension funds alone held $28 trillion in assets in 2017—more than the world’s largest economy—with less than 1% invested in green assets. Investors have a single, uniform complaint: no deal pipeline.
Most projects in sectors other than wind and solar are not bankable. Even wind and solar still suffer from challenging tariffs and offtake creditworthiness. Sectors such as forestry and agriculture are even short on viable business models without some form of government support.
Green finance in India
Generally speaking, green finance covers the financing of investments that generate environmental benefits as part of the broader strategy to achieve inclusive, resilient and cleaner economic growth.
Elements of green finance in India lie scattered and shallow. Most of the experience with renewables has been project financing by domestic banks. Although India is among the top issuers of green bonds, total issuances in 2017 stood at $6 billion—a fraction of what’s needed. More needs to be done to increase this number, including requiring audit trails and enforcement for the use of proceeds. Investment advisory services in green remain marginal businesses with scant understanding of international risk instruments, let alone experience with fund-raising that looks beyond renewables aggregators. Climate resilience of companies is neither rewarded nor penalized as there are no norms for value recognition. Standards and criteria for green (financial) products do not exist. The list goes on.
With technology costs on the decline, India’s growth needs on the rise and climate concerns not going away, the task ahead for green finance is to step up the pace.
To effectively finance India’s economic development in a sustainable way, three important tasks lie ahead. First, a national green finance strategy is needed, one that recognizes the preparedness level of sectors and the public capital instruments to be deployed. Such a strategy must include a recognition of incentives for sectors that need government assistance—separated between those that still need subsidies and those that need risk-managed regulatory fixes. Second, related to or stemming from the first, an ecosystem is needed that supports the development of more innovative instruments to find solutions for sectors outside those of the typical comfort zones of investors and banks. For example, more innovative ways of financing electric vehicles, or credit-enhancement instruments for scaling off-grid energy. Such an effort should include considerations for blended finance approaches, drawing on public institutional investment vehicles, and integrating green finance into foreign direct investment. Third, a real conversation is needed at the regulatory level to shape financial markets—such as introducing a taxonomy for green finance, green standards for financial products, duties of asset managers, requirements of the stock exchange, mandatory disclosure norms of companies, and so on.
Fundamental to integrating climate considerations into the financial system is a recognition of the inherent difference in time horizons. Climate change has long-term effects, whereas investment decision making (mostly) looks at near-term performance. A central focus, therefore, is to systematically reduce the undue pressure for short-term performance, introduce a discrimination between “green” and “brown”, and more comprehensively reflect the actual risk of the assets.
Financial centres like London and Luxembourg have set out their plans to seize the green finance opportunity by mobilizing capital, creating incentives for a low-carbon transition and consolidating knowledge. India needs to quickly grab this opportunity and build its own green finance market.