Indian Climate Finance Needs Improved-Climate

Recent research report by the Reserve Bank of India highlighted the severe economic implications of climate change on the Indian economy. The study observed that climate-related risks could significantly impact agricultural productivity, financial stability, and overall economic growth. It emphasised the necessity for immediate and substantial investments in climate-resilient infrastructure and technologies. Furthermore, the RBI pointed out that the financial sector must be proactive in managing climate risks, advocating for the integration of climate-related financial disclosures and stress testing to ensure systemic resilience.

The recent summer of 2024 starkly revealed the vulnerability of the Indian population to extreme climate change patterns. Unprecedented heatwaves, with temperatures soaring to record highs, resulted in widespread health crises, agricultural losses, and energy shortages. These extreme weather conditions disproportionately affected vulnerable communities, exacerbating existing socio-economic disparities. The situation underscored the urgent need for robust climate adaptation and mitigation strategies.

Climate finance is a critical necessity for India as it grapples with the escalating impacts of climate change. The alarming projection that global GDP could diminish by 12% with just a 1-degree rise in temperature underscores the urgency. In response, India has committed to achieving net-zero emissions by 2070, a bold target announced by Prime Minister Narendra Modi at COP26 in Glasgow. Achieving this goal necessitates substantial financial investments, estimated between $10 trillion to $12 trillion, to build the required infrastructure.

However, India's current regulatory and tax frameworks pose significant challenges. The government's reluctance to fully embrace blended finance, compounded by regulatory and tax barriers, hinders the flow of necessary capital. Additionally, the absence of a dedicated government agency to lead and synchronise efforts across various sectors further complicates progress. Addressing these issues requires a multi-faceted approach, starting with the creation of an enabling framework for blended finance.

Blended finance holds significant potential as a catalyst for Indian climate financing, bridging the substantial gap between the current investment levels and the trillions of dollars required to achieve net-zero emissions by 2070. This financial approach strategically combines public, private, and philanthropic capital, leveraging each sector’s strengths to mitigate risks and enhance investment appeal. By doing so, blended finance can attract substantial private sector investments that would otherwise be hesitant due to the perceived high risks associated with climate projects.

One of the primary benefits of blended finance is its ability to reduce the cost of capital. Public funds can be utilised to absorb initial losses or provide guarantees, thereby lowering the financial risk for private investors. This risk-sharing mechanism makes climate-related projects more attractive to institutional investors and banks, which are traditionally risk-averse. Consequently, it can unlock significant private capital, crucial for large-scale infrastructure projects necessary for India’s climate goals.

Furthermore, blended finance facilitates the development of innovative financial instruments tailored to climate needs. For instance, green bonds and sustainability-linked loans can be structured to attract diverse investor profiles, ranging from conservative pension funds to impact-driven philanthropies. These instruments provide flexibility and cater to different risk appetites, broadening the pool of available capital for climate initiatives.

Additionally, blended finance promotes the alignment of various stakeholders, fostering a collaborative environment essential for complex climate projects. By bringing together government bodies, private investors, and philanthropic organisations, it ensures that projects benefit from a wide range of expertise and resources. This collaboration can lead to more efficient project execution, better risk management, and greater overall impact. The government’s role in enabling blended finance is crucial. Policy reforms, such as tax incentives for green investments and streamlined approval processes, can significantly boost investor confidence and participation.

The net zero target of 2070 might seem like a distant goal, potentially diminishing the sense of urgency among stakeholders to take immediate action. This long-term horizon can lead to complacency, undermining the critical need for swift and decisive efforts to mitigate climate change impacts. To counter this, the government's role in crowding in private and global financing becomes paramount.

An effective policy need is to reduce legal and systemic risks, lower the cost of capital, and attract a broader pool of investment without imposing a direct burden on the public exchequer. The introduction of long-term, cohesive regulatory and tax policies is crucial in this regard. This framework would facilitate the flow of capital towards climate finance projects, mitigating risks and ensuring sustainable funding sources.

Moreover, the establishment of a specialised institution focused on achieving net-zero emissions and addressing climate change is imperative. Existing government bodies like NABARD and NIIF cater to specific sectors such as agriculture and infrastructure. There is a glaring gap in the form of a dedicated agency with the authority and mandate to drive climate action across various sectors. We need—India Climate Action Institution—to fill this void, ensuring coordinated efforts and addressing industry-specific challenges.

The development of technical assistance, metrics, and frameworks, including a much delayed formal Green Taxonomy, is another crucial step. These tools are essential for launching climate funding, climate insurance and other specialised financial products, which can help quantify and manage risks more effectively. By developing these frameworks, India can offer more affordable premiums and reduce the overall cost of capital for climate finance projects. This topic should be added to FSDC’s agenda till India achieves net zero.

The government must play a catalytic role by using its limited public capital to attract private investments strategically. Initiatives similar to the blended finance structures announced in the Union Budget 2022–23, aimed at financing startups in agriculture and rural enterprises, should be expanded to include climate finance. Additionally, enabling CSR and philanthropic funds through appropriate amendments to tax and CSR laws would provide an immediate boost to the blended finance ecosystem. By revising these regulations, the government can create incentives for corporations and philanthropic organisations to allocate a portion of their funds towards climate finance initiatives.

These amendments would lower the barriers to participation, making it more attractive for these entities to invest in sustainable projects. This infusion of CSR and philanthropic capital would not only supplement public and private investments but also signal a strong commitment to climate action, thereby encouraging further contributions from other stakeholders.

Srinath Sridharan is a policy researcher and corporate advisor.

Meyyappan Nagappan is partner at Trilegal Law.

The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.