Scaling up private finance is crucial to bridge funding gap for climate change projects

India’s position on climate change commitments garnered global attention with Prime Minister Narendra Modi’s bold announcement at 26th Conference of Parties (COP26) to the United Nations Framework Convention on Climate Change in Glasgow, Scotland, committing to achieve Net-Zero emissions by 2070. This ambitious pledge, unprecedented for a developing nation, signals a profound shift in India’s climate policy. 

The pledge was accompanied by substantial action plans, such as targeting 50 per cent renewable energy usage by 2030 and charting a roadmap for green hydrogen production. However, the realisation of these targets hinges on substantial and sustained financial investment, estimated at a staggering $10 trillion, nearly three times India’s gross domestic product or GDP. 

This monumental endeavour underscores both the urgency and the magnitude of India’s commitment to mitigating climate change and sets a significant precedent for global climate action.

Uneven climate finance distribution

Apart from the staggering finance required, the uneven distribution of climate finance sources in India is a pressing concern, which is primarily shouldered by the central government. Of the $44 billion raised in climate financing in 2020, 40 per cent was funded directly or indirectly through public finance. 

Another aspect of climate finance that needs attention is the over-reliance on domestic financing, with nearly 80 per cent of funds raised coming from domestic sources. International climate finance flows have been stymied by the non-fulfillment of financial obligations undertaken by developed nations. 

India has steadfastly called on the developed nations to meet their commitments, including the commitment to contribute $100 billion annually to the Green Climate Fund made during COP15 in Copenhagen in 2009, which was further reiterated and extended in the Paris Agreement, 2015. However, till date, India has only been granted a paltry $165 million from the above arrangement.

Private finance key

Considering this backdrop, the launch of India’s inaugural sovereign green bond in 2023 is commendable; however, it merely scratches the surface of the financial resources needed for a comprehensive green transition. It is thus imperative that private green finance be scaled up to meet the shortfall in green finance targets. 

Corporate Green Bonds have emerged as a preferred means of raising green finance by corporations to invest in ‘green-projects’. Furthermore, the oversubscription of India’s sovereign green bond issues, coupled with their ability to command a ‘greenium’ (favourable yield), indicates a growing appetite for green bonds within the Indian markets. 

India’s green bond issuance stood at $6.1 billion in 2022; however, with China issuing $64 billion worth of green bond issuances in 2021, the scope for growth of the green bond market in India is substantial. 

In order to attract more investors, including foreign investors, policy support from the government in the form of a definitive regulatory regime for green bonds is needed. Although Securities and Exchange Board of India (SEBI) updated its disclosure requirements for issuance and listing of green debt securities in 2023, requiring issuers of green debt securities to have third-party certification of the ‘greenness’ of their issue; there is still a need to address the risk of ‘greenwashing’ of dirty projects as well as non-performance by issuers post issue. 

The European Union Green Bonds Standard, also released in 2023, provides a good reference point in this regard. These regulations provide for a three-tiered review system of issues, measurement of the impact of green issues and strict compliance with EU taxonomy regulations for classification of bond issues as ‘green’.

Greening ‘brown’ balance sheets

While it is one thing to streamline the framework for making green issues for corporations, it often requires the establishment of a ‘business case’ for them to make green investments. The ever-increasing popularity of application of environmental, social and governance norms to corporations and increasing investor awareness should be leveraged to nudge businesses to make financial investments towards reducing their carbon footprints.

Several European nations, such as the United Kingdom and France, have done this by introducing mandatory climate-related disclosures in their annual statements by companies. Firms are now required to disclose the environmental impact of their actions, the financial risks they face due to climate change, etc.

The logic is that if companies are made to disclose the climate risks associated with their businesses, investors are likely to re-assess their investment decisions and move towards companies that incorporate the impact of climate change in their business decisions. This, in turn, would force other companies to make green investments as well.

France, in particular, has seen a reduction of 39 per cent in fossil fuel-related holdings of institutional investors on the back of introducing mandatory climate disclosures. While SEBI introduced its Business Responsibility and Sustainability (Core) Framework, which presently requires the top 150 listed companies by market capitalisation to make climate related disclosures, it applies on a voluntary basis and has limited coverage.

In the collective battle against climate change, the imperative for sustained financing demands a harmonious partnership between public and private sectors. Only through such collaborative efforts can India’s ambitious Net zero target be transformed from a distant aspiration into a tangible reality.

Aastha Suman is an Indian Revenue Service officer of 2017 batch while Ishaan Sharma is an Indian Railway Accounts Service officer. Both are presently studying at King’s College, London on a Chevening Scholarship.

Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth