The Unseen Cost Of Climate Inaction: Financing India’s Sustainable Future

The world is on the brink of an irreversible climate crisis; the cost of inaction extends far beyond economic calculations—it is eroding humanity’s will to thrive. India, with its diverse geography, faces a daunting challenge: how to sustain economic growth while simultaneously addressing the escalating impacts of climate change. Global political lethargy and apathy of the western nations have delayed critical action, but there is still hope if decisive steps are taken now. Central to this effort is the role of finance, which must be mobilised at an unprecedented scale to drive the industrial shift that India needs to mitigate and adapt to climate change. 

The reality of climate change is already being felt across India. The increasing frequency and severity of extreme weather events—harsher summers and winters, unseasonal floods, droughts, or cyclones—are a clear signal that immediate action is required. According to the Council on Energy, Environment and Water, 75% of Indian districts are now hotspots for extreme weather, compared to just 10% in 2005. The Reserve Bank of India has estimated that the economic losses due to climate change could reduce the country’s GDP by 3% by 2030 if no action is taken. 

But beyond these economic metrics lies a deeper impact on society. Climate change exacerbates existing inequalities, pushing the most vulnerable further into poverty and diminishing their capacity to recover. Climate change profoundly impacts India's vast middle class, often in ways that go unnoticed in broader discussions. This demographic, which is the backbone of the country's economy, faces increasing financial strain due to climate-related disruptions. Extreme weather events, such as floods and droughts, lead to rising costs of essential goods like food and energy, disproportionately affecting middle-class households with fixed incomes. Additionally, climate change adds to public health issues, resulting in higher medical expenses and loss of productivity. Property damage from frequent natural disasters and the escalating costs of insurance further erode their savings and financial security. Moreover, as industries adapt to environmental regulations, the middle class may experience job dislocation and reduced employment opportunities, particularly in sectors vulnerable to the transition toward a low-carbon economy. 

In this context, finance becomes a crucial instrument of change. The World Economic Forum estimates that India needs $2.5 trillion in climate financing by 2030 to meet its commitments under the Paris Agreement. This financing must come from both public and private sources, with private capital playing an increasingly critical role. However, mobilising the required finance is fraught with challenges. Moreover, the long-term nature of climate investments often clashes with the short-term horizons that dominate financial markets. 

Traditional financial systems are ill-equipped to address the unique risks posed by climate change, primarily because they were designed to manage conventional economic risks rather than the complex, long-term challenges associated with environmental shifts. For instance, the World Bank estimates that climate-related risks could wipe out up to 10% of global economic value by 2050 if unaddressed, yet most financial institutions lack the tools and frameworks to integrate such risks into their decision-making processes. The conventional risk assessment models often fail to account for the nonlinear and unpredictable nature of climate impacts, such as the cascading effects of extreme weather events on supply chains or the long-term degradation of natural resources that could render certain assets stranded. Additionally, the absence of standardised metrics for assessing climate risks complicates efforts by investors to evaluate the true exposure of their portfolios to climate-related threats. The Bank for International Settlements has pointed out that climate risks are deeply interconnected with financial stability, yet only a small fraction of banks globally have begun to incorporate climate stress tests into their operations. Without a systemic overhaul that includes integrating climate risks into financial regulations, disclosure standards, and risk management practices, traditional financial systems will continue to fall short in managing the profound and escalating challenges posed by climate change. 

Despite these challenges, there is a growing movement toward innovative financing mechanisms designed to address climate change. Green bonds, climate funds, and other instruments are starting to bridge the financing gap. Yet, the scale of these efforts must increase dramatically to meet the enormous financing needs. 

The financing challenge extends beyond mere capital mobilisation; it also involves managing the risks associated with the transition to a low-carbon economy. Transition financing, which supports industries in shifting from high-carbon to low-carbon operations, presents its own set of difficulties. This process can lead to economic dislocation and job losses in sectors heavily reliant on fossil fuels. Addressing these impacts requires substantial investment in reskilling workers and supporting affected communities. The Indian government’s policies, such as the National Action Plan on Climate Change, or NAPCC, outline a strategic approach to these challenges, but their implementation demands significant financial resources. Public finance alone is insufficient, making it crucial to attract private investment and international funding. 

Regulation plays a pivotal role in shaping the financial landscape for climate action. Financial regulators need to embed climate risks into the fabric of financial decision-making. This involves integrating climate risks into credit assessments, investment strategies, and risk management frameworks. 

Moreover, financial regulations can nudge markets toward more sustainable practices by creating incentives for climate-friendly investments. For example, introducing risk-weighted capital requirements that reflect the climate-related risks of certain assets could encourage banks to allocate more capital to sustainable projects. Similarly, tax incentives for green bonds or climate-focused funds could stimulate greater private sector participation in climate financing. At the same time, policymakers should consider implementing penalties for investments in carbon-intensive industries, further driving the shift toward a low-carbon economy. 

To accelerate climate financing towards meaningful scale balanced with risk frameworks, the Reserve Bank of India, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India can take several strategic steps. The RBI could introduce mandatory climate risk assessments in banking operations, encouraging banks to integrate environmental, social, and governance, or ESG, criteria into their lending practices. Additionally, SEBI could enhance disclosure requirements for publicly listed companies, mandating detailed reporting on climate risks and carbon emissions, thereby improving transparency and enabling investors to make informed decisions. IRDAI could incentivise insurance companies to offer products that support climate resilience, such as insurance for climate mitigation and adaptation projects and climate risk insurance. Collectively, these measures would create a more robust framework for climate finance, aligning financial markets with the nation’s sustainability goals. 

In the interconnected world we live in, the actions—or inactions—of one country have far-reaching consequences. As one-sixth of humanity resides in India, the nation’s approach to climate action will have a significant impact on global efforts to combat climate change. The path forward requires collective action, with the Indian government, private sector, and international community working together to scale up climate finance. India has the potential to lead the world in climate action, but this requires urgent and sustained effort. The cost of inaction is too high, not only in economic terms but also in human and social terms. 

Srinath Sridharan is a policy researcher and corporate advisor. Madhav Nair is a banking professional. 

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