Taking climate change in hand

Following ratification of the Paris climate change agreement in April 2016, the United Nations Framework Convention on Climate Change (UNFCCC) announced, “Record Support for Advancing Paris Climate Agreement Entry into Force”. The ratification ceremony, which saw participation from 55 world leaders, civil society and private sector, substantiated the conviction that the world is determined to take action on climate change.

The historic agreement has created a new landscape for galvanising and catalysing collective action. However, delivering climate action to limit the global temperature increase to 1.5 degree above pre-industrial levels would need enormous will, collaboration and finance. The collective cost of implementing Nationally Determined Contributions in developing countries alone amounts to $3.5 trillion, according to Carbon Brief, a UK-based climate think tank.

The Indian government estimates that the cost for India alone is at $2.5 trillion. Further, the funding required to work towards meeting the sustainable development goals (SDGs) is estimated to be $172.5 trillion until 2030. These figures are significant but achievable through major collective action by global actors. The Paris agreement has armed us with a plan and now it depends entirely upon our collective ability to visualise, strategise and actualise that plan. It is evident that a transition to a low-carbon economy would require a radically transformed financial system, and there are clear, visible signs that financial institutions, businesses and investors are now increasingly putting climate at the centre of their decision-making. While public financing and development aid would remain crucial sources of funding for NDCs and SDGs, the agility of the private sector to mobilise mainstream finance in the form of private financing, foreign direct investments and social impact investments, would be critical in addressing a predicted deficit in public finance.

Hence, greening of the global financial systems would require financial institutions to play the proactive role of ‘sustainability catalysts’ and address the global challenges by aligning the financial systems to build a more robust financial architecture, which is also explicitly mentioned in the recent UNEP inquiry report. The need is to create a business case for opportunities balancing economic growth and sustainable development. An impetus on unique, scalable and sustainable business strategies would drive businesses and financial institutions to perform better and there are five key focus areas that the financial sector needs to look at.

First, clarity on what constitutes green finance : There is no single definition. The terms ‘green finance’, ‘sustainable finance’, ‘climate finance’ are understood as an overlapping territory environmental, social, economic and governance issues. Once a definition is arrived at, the financial sector would be comfortable funding ‘green initiatives’.

Second, focusing on environmental, social and governance (ESG) disclosures and integrating ESG parameters into lending decisions : This would create a robust framework for sustainability performance measurement and reporting. Embedding ESG parameters into core business strategy would be a crucial shift towards recalibrating risk, dealing with climate stress, and improving mitigation measures. Enhanced ESG disclosures in the form of checklists as part of annual reports would assist investors in making well-informed decisions. In fact, the world’s largest asset managers such as BlackRock are increasingly influencing companies to prioritise ESG factors. The financial sector needs to look at rebalancing portfolios in view of climate and environmental impacts. Environmental stress-testing would serve as a very important step to strengthen the portfolios and support a low-carbon growth.

Third, investing proactively in positive impact sectors : India’s transitioning economy is faced with basic developmental challenges such as access to clean and affordable energy, clean drinking water, financial inclusion, and employment generation. The Government has an ambitious target of generating 175GW renewable energy by 2022. This, coupled with understanding inherent risks, availability and access to latest technology and enabling policies, have contributed to making this sector commercially viable. Its success could serve as a perfect template for creating a strong business case to attract investments.

Fourth, greater use of differentiated financial instruments such as green bonds : India’s first Green Infrastructure Bond was issued by YES Bank in February 2015. This $160-million issue was followed by IFC’s private placement of $50 million through a five-year Green Masala bond on the LSE, which opened up avenues for international financing for end-use domestic markets. The success of these issues demonstrate that financial institutions in developing economies could source overseas funding through financial instruments such as climate bonds.

Lastly, mainstreaming sustainability among stakeholders : Leveraging the collaborative power of coalitions and convenings and collectively working along with relevant stakeholders would help achieve SDGs and NDCs.

YES Bank’s strong association with various national and international entities including World Business Council for Sustainable Development, World Resources Institute, Carbon Disclosure Project and The Climate Group has brought together the diverse skillsets and mindset needed to deal with global agendas shaping a new era for businesses.

In conclusion, a globalized response to the world’s challenges is required, and cohesive efforts from all alone would adequately deliver on our stated goals, which in turn would add to meeting the target of limiting temperature rise to 1.5 degrees. The call for climate action would need both, nations and corporations, to innovate, and collectively work towards a sustainable future for not only emerging economies such as India, but the entire world.

The writer is MD and CEO of YES Bank

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