The Green Billions

Climate Finance and its role in global Net Zero ambitions

The United Nations Environment Program (UNEP) estimates the global cost of adapting to climate change impacts could grow to $140-$300B annually by 2030 and double that by 2050 [1]. The economic impact of this could be a reduction of the global economy by at least 10%, should the global temperatures rise by 2°C by 2050 [2]. This alarming statistic reinforces the idea that a lot more investment is necessary to merely prop up the world’s economic activities to the extent they are now, let alone mitigate or even reverse the trend. The most attractive solution is a growing systemic focus on sustainability in finance as a technological and business sustainability driver. This is where Green Finance comes in.

What is Green Finance? 

Green Finance (GF) is a catch-all term for all financial flows, including loans/investments. These include carbon emission reduction, carbon capture, climate change resilience, climate justice, and clean technology transfer and adoption. Within this, climate finance (CF) refers to financial flows aimed at reducing emissions and enhancing GHG sinks while also increasing social and environmental resilience against the adverse effects of climate change. 

History and the road to consolidation 

The history of GF begins with the popularization of CSR in the 1980s-90s, through which business leaders, governments, and civil society recognized the role of businesses andfinance in environmental conservation and resilience. Initiatives in the early 1990s, such as the UNEP Financial Initiative (FI) and the Convention on Biological Diversity (CBD). These set out principles through which businesses could engage and influence environmental projects, furthered by the Principles of Responsible Investment (PRI) and other developments in the 2000s. Meanwhile, the first-ever Climate Awareness Bonds and Green Bonds were issued, which challenged the conventional assumption that investments in environmental and social causes were bound to yield lower return rates than traditional investments. 

Yet, these efforts were disparate and unconsolidated. The effects of the 2008 economic recession dampened enthusiasm toward such initiatives and products. As the world economy recovered, the need to align finance and policy with environmental and social priorities became increasingly apparent and an active area of international discussions on the environment. The Addis Ababa Action Agenda of 2015, along with the introduction of the United Nations Sustainable Development Goals (SDGs), introduced targets, KPIs, and finally, a philosophy for finance flow towards consolidating advancements and expansion in sustainable transition. The outcomes included action areas in public resources, private businesses, trade, finance and credit, science and technology, and cooperation on domestic and international levels.

What does climate finance currently look like?

Public funds 

Today we see a large and growing flow of CF from capital markets, government budgets, and private funds. These funds are channeled through new commitments from developed to developing countries (e.g., the Official Development Assistance of the OECD), emission reduction obligations from local and international parties, carbon markets, and private sector investments.

Primary CF sources include Foreign Direct Investments (FDI) and multilateral & private funds. Important multilateral funds (e.g., Green Climate Fund (GCF), Global Environment Facility (GEF), Climate Investment Funds (CIFs), and Adaptation Fund (AF)) using grants, debt, equity, and risk mitigation products to help developing countries secure significant investments on the public front. In fact, India is the largest benefactor of any single country from GF and CF.

Private funds 

Yet, it is important to recognize that while public funds are a great driver of government-supported development programs, access to such funds is reserved for large-scale contractors, financial institutions, and infrastructure providers. To improve access to CF as a funding solution for small & medium projects, private funds are an important source. This includes finance flows from commercial banks, investment companies, pension funds, insurance companies, and other wealth funds. The smaller scale, combined with lower risk, makes smaller financial institutions ideal finance sources for sustainable urban and local infrastructure projects, representing a larger cross-section of possible projects with sustainability impacts. 

While CF is intended to fund environmental projects, the principles are still rooted in economic gains – investors and financial institutions have to view investment from a risk and opportunity perspective. For organizations to attract CF, it is important to demonstrate investability and healthy return rates. Potential benefactors can demonstrate this by adopting strategies and actions in socio-environmental risk management, ESG integration, and taking advantage of new and future socio-environmental opportunities.

What is the road ahead for climate & green finance in India? 

The GF sector in India is majorly represented by the banking sector, which plays a key role. As recommended by the Sustainable Markets Initiative (SMI) – a global executive-level invitational initiative for improving market-based sustainability practices – the Reserve Bank of India 2015 started the Priority Sector Lending Scheme for small renewable energy projects. With most banks following suit in providing finance and microfinance options, as of March 2020, GF encompasses around $5B in outstanding banking credit, 7.9% of that of the power generation sector of the country. 

There are a few barriers ahead for India in GF, including keeping the borrowing costs low enough for mass adoption (which, of course, in terms of scale is much larger in India than in most developed countries), and, crucially, verifying sustainability claims, since the baseline is not a directly observable phenomenon. Due to India’s scale and unique socio-economic situation, GF providers must find new innovative financing models to suit Indian challenges specifically. Models must be able to increase access, navigate the regulatory framework, and incentivize earlier adoption of “green technology,” which is often more expensive and complex. It is imperative that policymakers also play their role, for example, by altering taxation policy for GF to reduce transaction costs. 

Author’s Take | The direction that the financial community has adopted since 2015 is much more comprehensive and channelized, where financiers and project developers can consolidate current work on the environment through a more efficient finance pipeline. Yet, many new challenges stem from the acceleration of the transition, which must be continuously solved and refined. None of this undermines the fact that GF and CF are becoming increasingly accessible for the average organizations regardless of scale, which can only prompt more economic growth and an increased share of sustainable products and services.

About the author 

Krishnakumar Ramachandran | Krishna is a Biosystems Engineer and Biotechnologist with a background in sustainability, biobased transition, bioplastics and biofuels, energy, agribusiness, and natural resources. Having worked in R&D and having started up, he ‘transitioned’ to sustainability to make a tangible impact to people and the environment. As a freelancer, he works with sustainability consultancies in ESG, GHG accounting, carbon offsets and credits, and tech-advisory. He writes articles on sustainability strategy, corporate sustainability, energy transition risks.