Originally published in Network18 Media here
Written by Sourajit Aiyer
While the conversation on climate change is slowly becoming a part of our lives, how difficult and expensive is it to tackle the problem of climate change?
With implications for social ecosystems, demand and supply of goods and the sustenance of corporate profitability, tackling climate change poses a major business case now. Stakeholders have recognised this, resulting in a louder discourse on solutions for climate issues. The scientific community is working to validate solutions, while the finance community is looking at alternative funding models.
Climate finance is critical to tackle the issues posed by climate change and achieve the goal of limiting the rise in earth’s average temperature to below 2 degree Celsius over pre-industrial levels, something the 2018 IPCC report has predicted. But while the Paris Agreement saw developed countries agreeing to raise $100 billion per annum till 2020 in climate finance for the developing countries, the actual achievement has been dismal.
Almost 75% of the funds raised by the developed countries for climate finance are used domestically, despite developing countries bearing a significant burden of the emissions and loss of natural ecosystems as a result of the industrialisation-drive in the developed world.
And while the low-to-mid income countries are raising some domestic funds for their national climate change targets, it is far inadequate of the scale required. India alone estimates it would need $2.5 trillion till 2030 to tackle its climate targets, an amount far higher than what this $2.6 trillion economy has invested in its total infrastructure in recent decades. And given a lack of quantifiable targets, global climate finance agreements remained ineffective. The largest climate finance fund from public sources, the $100 billion Green Climate Fund, has a corpus far less than the requirements.
Secondly, most climate funds have flown into mitigation, rather than adaptation (mitigation refers to devising new solutions and way of doing things, while adaptation refers to managing the current issues).
India’s climate funding has also concentrated on mitigation. However, adaptation is said to be essential to improve the resilience and reduce vulnerabilities of communities to climate shocks, and it typically requires relatively less investment and innovation.
Next, climate finance has mostly concentrated on renewable energy, green buildings and urban transport, because it is easier to estimate their cash-flow cycles. Other sectors which hold implications of equal magnitude to our natural and social ecosystems, like agriculture, degradation of land, water, etc. have seen a muted interest.
But with a large share of manpower dependent on these sectors, there is a need to draw up alternate models so that cash-flows can be better estimated. This is essential given the disproportionate pressure on private capital to make up for the dismal funding from public sources, since private sector capital must look at numbers at the end of the day.
Policy and industry action must converge to take climate finance ahead in India. One is to mainstream the mind-set of the business community ongoing sustainable in their business models. That would push the demand for alternate solutions on climate issues, thus giving further momentum to climate finance efforts.
Credit guarantees have worked to reduce the risk component from sustainable investments, and such guarantee mechanisms must be given disproportionate focus in blended finance models whilst utilizing sparse public sources. Moreover, a guarantee would not require an immediate pay-out by the public funds, unlike investment. Another option is the interest-subvention scheme to reduce the borrowers’ cost for climate projects.
Given the shallow corporate bond market in India, it needs to relax restrictions on other investor categories to invest in sustainable finance. This includes pension funds, sovereign funds and non-resident Indians. While INX, BSE’s green bond platform is operational, India must make its green finance market more robust. Many Indian companies raise green bonds in London, and domestic exchanges must upgrade themselves to cater to this. This includes extending the credit-rating capabilities of rating agencies, apart from green investment banks.
Another alternative is to utilize the cash generated by renewable or transport projects to fund the other sectors in those local communities.
In the end, with more hype than substance occurring in the climate finance market currently, both globally and in India, there is a temptation for greenwashing. But this only erodes the confidence of investors on the applicability of those climate solutions and the genuineness of the implementing agencies (government or development agencies).
Hence, an audited Monitoring and Evaluation (M&E) system of the project is needed from the initial years itself, on similar lines like statutory audit reports of private companies. No development project worth its salt would have anyway raised a cent without making a Theory of Change framework, and this framework can be built upon to develop the M&E system.
This would ensure proper and consistent reporting of the projects’ impact and would go a long way to restore the confidence of the investor community for furthering climate finance in India.