Innovative finance for a greener India

Climate change is arguably the biggest challenge of our times and poses a global threat to civilisation as we know it. It’s also the single reason that brought 195 countries of the world together in an unprecedented agreement at Paris in December 2015. This dual nature of the climate crisis which on one hand is poised to disrupt ‘business as usual’, and on the other holds a promise of ushering in an age of collaboration and disruptive innovation, is also perhaps the biggest opportunity of our times.

The recalibration of the global economic compass towards a cleaner, greener and low carbon future, has given rise to new paradigms that redefine the metric of economic growth and development. Emphasis has shifted from mere productivity to efficiency, profitability to sustainability, and from expanding footholds to minimising carbon footprints.

New sectors of growth such as renewables, electric mobility, energy efficiency and climate smart agriculture, amongst others, have emerged as harbingers of a new, low-carbon economy. India has been at the forefront of this movement. To underscore its commitment to building a climate resilient future, it has voluntarily undertaken the Hanumanian national target of reducing emissions intensity of GDP by 33-35 per cent by 2030. One way it plans to achieve this is by reducing India’s reliance on fossil fuels and increasing the share of renewables in its energy mix to 40 per cent by 2030. With its recent aim of making India the first country in the world with all-electric vehicles by 2030, the government has also made its ambitions clear on developing a future-ready economy.

Transforming India into a truly green economy still requires concerted efforts on two main fronts – making the required financing available, and ensuring innovation in its deployment, areas in which financial institutions can play a significant role.

The transition to a ‘low-carbon economy’ is entirely dependent on the mobilisation of large financial resources. India’s ambitious Nationally Determined Contributions (NDCs), part of the Paris Agreement, are estimated by the Government to cost $2.5 trillion by 2030. According to industry estimates, the target of achieving a renewable energy installed capacity of 175 GW by 2022 alone would warrant $100 billion in investments. The mammoth scale of such funding requirement has made climate finance a critical component in climate-proofing the economy.

Financial institutions can play a crucial role in mobilising climate finance and investments by leveraging existing financial mechanisms. Leveraging the debt market, Green Bonds have emerged as a successful bridge between capital markets and addressing climate change. Since its first issuance in 2007, by two multilateral development banks (World Bank and European Investment Bank), green bonds have grown exponentially as a key tool to raise climate finance, with cumulative issuances pegged at over $180 billion globally by the end of 2016. Just like green bonds, other innovative mechanisms such as blue bonds have great potential to emerge as a mainstream financing mechanism for water related projects.

India’s green bond market is currently pegged at about $3 billion, with the majority of it being allocated to renewable energy projects – contributing directly towards achieving India’s NDCs. Green municipal bonds hold promise towards building the 100 smart cities planned by India, through market interventions to revive the dormant municipal bonds market.

International and multilateral organisations have also been supporting climate action in developing nations like India by deploying green finance. The Green Climate Fund has recently announced that it would invest in a ground water recharge and solar micro-irrigation project in vulnerable tribal areas in Orissa for the next four years. Funds such as these serve the dual purpose of bridging the financing gap for sustainable development and establishing feasibility of investments in new sectors.

The quantum of finance required to move towards a climate sustainable future is only one part of the challenge. Effective deployment and channelisation to the emerging climate positive sectors is another crucial element. These new economy sectors are at different stages of development and require customised financial solutions to deliver on India’s climate targets.

Innovation is key to create new and tailor-made financial products and services. For a sector like renewable energy which has reached a certain scale, securitisation of long term assets could help provide the low-risk incremental capital, required for the next phase of growth. For an emerging and untested sector like e-mobility, there is a need to ensure access to mainstream financing channels. Financial mechanisms such as credit enhancement are instrumental in reducing the perceived high risk of such sectors. For smaller and more local climate adaptation initiatives, blended finance can help leverage public funds to crowd in private investments and drive socio-environmental benefits for local communities.

Though the green finance space has witnessed significant developments in India, there is still enormous untapped potential. With climate action taking centrestage in policy decisions globally, it is time for collaborative efforts and disruptive innovations to unleash the full potential of the new economy and embark on a journey of green growth.

The writer is the founder & CEO of YES Bank

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