A glance at the OECD’s climate finance trends report 2022 indicates that of the targeted $100 billion aggregate climate funding, about $83 billion was mobilized from developed nations via global agencies through 2020. Of this, bilateral and multilateral public climate finance from the developed West stood at $68 billion, comprising concessional and non-concessional loans (71%), grants (26%) and equity (2%), while private climate finance and export credit extended via agencies comprised just $15 billion. These total 2020 figures highlight the challenges in mobilizing the colossal climate investments required by the developing world each year. Not only must India continue pushing rich nations to contribute additional monies for past excesses, but also mobilize more private capital finance on its own by co-creating an auxiliary funding mechanism.
The global thematic split reflects that of the $83 billion, $49 billion was invested in climate mitigation activities focused mainly on cleaner energy and transport, while about $28 billion was spent globally on climate adaptation, mainly for agriculture, water supply, forestry restoration, coastal fishing and sanitation. This $49 billion in 2020 mitigation investment globally pales in comparison with India’s $250 billion renewables installation need by 2030. The UN secretary general worryingly underscored that the adaption finance needs of developing countries will gallop to $340 billion annually by then. Clearly, we have a widening gap to bridge.
Experience suggests that depending solely on timely Western public funds, per current or post-2025 quantified agreements, will be unwise in times of geo-strategic competition and recessionary fears. Monies from rich countries are unpredictable, yet the allocation thereof by global agencies is predictably done among least developed and developing nations across Asia (42% of the 2020 total), Africa (26%) and Latin America (17%). With India already the fifth largest global economy and moving towards shaping world agendas, we must temper our expectations of such funds on concessional terms. Actual figures in India’s kitty will thus continue to be insufficient for our needs. Also, as with our sovereign green bonds, these funds will largely be earmarked for select public sector projects or renewable energy mitigation and low-carbon transport systems planned under India’s long-term Low Emissions Development Strategy (LEDS) for climate action. But what about adaptation and mitigation financing for compact businesses, SMEs and local communities? Surely, they need to be taken along too.
While fiscal incentives like production-linked incentive (PLI) schemes may work in drawing manufacturing mitigation investments for utility-scale solar or wind, financing for most businesses across India’s credit curve requires a different approach that rewards entities seeking to build resilience through a sustainability focus. So, what can be done?
We could aim for a banking framework wherein Indian banks are nudged to lock in long-tenure, low-cost private climate capital from alternative sources, like overseas investor institutions, global pledge organizations, private philanthropy, CSR budgets, etc, and are incentivized to on-lend cheaper loans to diverse businesses. Arming banks with risk weight and priority sector incentives can help extend concessional low-coupon, shorter tenor sustainability financing to clients. This may also deepen funding liquidity for lower-rung entities and improve global forex inflows at a time of weak exports. Next, delineated projects of larger companies or well-rated special purpose vehicles that meet pre-set mitigation specifications should continue to be encouraged to raise funds through domestic financial institutions (DFIs), project financiers and private and sovereign green bonds. Lastly, impact funds, blended finance instruments and venture capitalists betting on new climate technologies need to be nurtured for the purpose.
Such a climate banking framework can fulfil a wide set of goal, while fintech startups and digitization can play a big supporting role in connecting small clients with banks. Regulators and financiers need to evaluate various use-case scenarios before implementation. For instance, block-level wholesalers/transport operators or fertilizer and tractor sellers can be incentivized to arrange machinery for mulching crop stubble into farm fields or recycling waste for biofuels, with the objective of lowering husk-fire emissions and air pollution across the Indo-Gangetic plains. Given average credit profiles and smaller loan sizes, green bonds won’t be feasible here, while DFI funds and direct fiscal transfers by the government may only work partially. Low coupon sustainability-linked bank loans or overdraft facilities at the entity level would be a more practical adaptation solution for many across the rural and urban divide.
As India lays out a G20 agenda, the government should set the direction for augmenting our private climate finance framework, too. Inclusive growth with relentless and resilient development (“Sahit Vikas, Satat Viksan") should be our mantra, as the country marches forward in its quest towards net-zero emissions powered by a people’s movement as much as low-cost climate finance.
Ashiesh Kapoor is a corporate banker and transition finance enthusiast
