Moneycontrol, October 18, 2023
By PRADEEP S MEHTA & SANKALAN DEY
In the complex world of global environmental stewardship, India has emerged as a standout performer within the G20. A testament to its commitment to climate action, India finds itself amongst the top 10 nations in the Climate Change Performance Index. This not only underscores its keenness but also places it on the frontlines of countries striving for sustainable practices. India’s road to sustainability for the year 2023 began with a wide array of agendas to ensure adequate financing initiatives to mitigate climate change.
The initiation began with the prioritisation of green growth in the current year’s budget. Furthermore, India issued its inaugural green sovereign bond, securing $1 billion at a more economical capital cost compared to traditional debt. The Reserve Bank of India (RBI) also announced the issuance of new guidelines on climate stress testing, climate disclosures and green deposits at the banks.
Developing countries require at least $6 trillion to mitigate climate change challenges. The Global Financial Stability Report by the International Monetary Fund (IMF) notes that “The private sector needs to cover 90 percent of the climate mitigation investment in emerging markets and developing economies (EMDEs), excluding China, as the public investment growth is projected to be limited”. Instead of being contingent on the traditional way of funding, blended finance has always been one of the major tools to get additional finance to achieve sustainability strategically.
Private sector investments currently constitute around 40 percent of the net investments, according to data from the Climate Policy Initiative, and calculations supported by the International Energy Agency (IEA) and the International Monetary Fund (IMF).
As a part of the G20 Presidency, the Independent Expert Group (IEG) led by Larry Summers and NK Singh underscored the critical role that Multilateral Development Banks (MDBs) would play, particularly in the context of smaller economies, to attract climate change financing. It is anticipated that countries like India and China, with established capital markets, would achieve the approximate figure for private financing without significant hurdles. In the Indian context, the statement highlights that while the country boasts a strong capital market, it encounters difficulties achieving the required financial thresholds.
The key issue is the inadequacy of both hard and soft infrastructure for climate finance, resulting in an imbalance in data, and in every sector, investments are typically governed by data-driven decision-making processes. There is a common misconception regarding the generation of funds from the private sector to mitigate climate change. The private sector is often expected to act as a philanthropic organisation and fund only climate-friendly projects. The contribution from the private sector can also be assessed through various initiatives undertaken in their own private capacity, such as the purchasing of climate-friendly goods and services.
To further incentivise private sector involvement, two key factors need to be addressed — making such investments financially rewarding to enhance their attractiveness and implementing de-risking mechanisms to provide a sense of security for safeguarding these investments. India currently lacks a robust carbon pricing mechanism, which has implications for private investments. The absence of direct financial incentives for low-carbon projects makes them less appealing than carbon-intensive alternatives, amplified by uncertainties in policy and technology.
Public-private collaboration is the cornerstone of an effective strategy for scaling up climate finance. Project-based funding, which combines public and private resources for climate-positive infrastructure projects, helps de-risk investments for the private sector. In this model, public equity capital complements private debt investment, reducing overall borrowing costs and giving the public sector influence over investment decisions. Moreover, public-private partnership investments substantially lower borrowing costs, enabling the private sector to make informed decisions and avoid loss-making projects. Leveraging the public sector’s expertise in areas like project selection and capacity development enhances the approach’s effectiveness.
Success stories from private-public investment ventures offer valuable lessons for India and similar economies aiming to boost private finance. For instance, the Amundi Planet Emerging Green One (EGO) Fund allows the public sector to accept lower returns for positive climate outcomes, reducing borrowing costs for potential investors. The Green Credit Continuum (GRECO) programme directs capital to underdeveloped segments in the European green fixed-income market. However, the effectiveness of a public sector equity tranche and the extent of risk it takes depends on factors like carbon pricing and mitigation policies. In their absence, the “public tranche” risks becoming an opaque and inefficient form of public transfer.
India’s strong dedication to climate action is unmistakable, reflected in its top-tier position on the Climate Change Performance Index. As it embarks on its sustainability journey in 2023, harnessing private-sector investments and embracing partnerships between the public and private sectors emerge as crucial measures to achieve ambitious climate finance objectives.
Pradeep S Mehta is Secretary-General and Sankalan Dey is a Research Associate at CUTS International, a global public policy research and advocacy group. Views are personal, and do not represent the stand of this publication.
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