Originally published in India Climate Dialogue here

Written by Sourajit Aiyer

Climate change has emerged into the global consciousness, especially of millennials set to become tomorrow’s consumers, in a volcanic manner that institutional investors can no longer ignore. Urgent steps, including significant investments, are needed.

In India, the government estimates the country will need USD 2.5 trillion in finance to meet climate change targets. The scale is more than what India has managed so far, since its aggregate investment into infrastructure has been just over USD 1 trillion over the last decade and a half.

But fund management skills apart, India faces a bigger challenge. Climate finance flows, or rather of green finance, are highly skewed — in terms of sectors and investors — and this is a missing middle in realising India’s climate finance objectives.

Climate finance remains a story of renewable energy, green buildings and urban transport in India. It is easier to forecast a cash-flow trend due to their tariff-based model. Green finance flows in India have been as much led by the private sector as the public sector, and they do have to look at numbers.

A policy push from the government towards renewable energy helped, with commitments to raise renewable capacity to 175 MW by 2022 and source 40% of India’s power from renewable sources by 2030. The push towards e-vehicles has helped too.

Missing sectors

However, other sectors are largely missing from the green finance raised for India so far, and these sectors employ a significant percentage of mid and low-income population who would be the worst impacted by climate change. Take agriculture, for instance. One can take a guess of the sheer count of working-age people who derive their livelihood from agriculture in a country like India. Moreover, about 70% of farmers in India are smallholders, with an average landholding of around one hectare.

The struggle to meet the input costs for cultivation coupled with falling prices of their produce resulted in smallholder farmers’ income growing by its slowest in recent years. Climate change brings further foreboding. And farmers perhaps comprise a far larger constituency for politicians to fret about.

We need financing and market access for climate smart agriculture and similar green initiatives that touch the lives of the poor and the lower middle class. The financing has to have predictable cash-flows. We can also explore alternative structures wherein returns generated by focus sectors like renewables and transport are used to fund the other sectors.

This may mean a downstream marketing entity with an offtake agreement for the produce with local farmer producer organisations or cooperatives. Funding micro-irrigation and small and medium enterprises is another area where sustainable finance is yet to make meaningful headway, despite these employing millions in India as well.

Growing green bond sales

The good news is that green bond sales have grown significantly, doubling year-on-year to USD 3 billion in 2017. One reason why global funds preferred India was its stricter rules on the end-utilisation for the funds. Average deal sizes picked up. This bodes well, since otherwise their small-ticket size meant they fell out of the purview of larger pension funds and remained restricted mostly to venture-capital funds.

But the bad news is domestic investors largely shied away from this despite India seeing significant institutionalisation of retail money and financialisation of domestic savings. If the magnitude of domestic investments that flowed into the capital market in recent years is any indication, then the sectors most impacted by climate change largely lost out in evincing investments from this growing base.

Even global funds looked at India only for the sectors mentioned earlier, and it is only now that there is discourse on exploring alternate avenues like blended finance, guarantees or political risk insurance to mobilise private capital for other critical sectors like agriculture, natural resources etc.

Relax some rules

India should also relax the rules for pension and insurance funds in green finance, apart from opening this space for retail or non-resident Indians. To open new channels, India should also incorporate effective rules for aggregation, such as bundling of small loans into products that meet the needs of larger institutional investors.

As these steps take off meaningfully, the investor base would transform into a mix of development finance agencies, sovereign funds, pension and superannuation funds, domestic institutions, high-net worth money, family offices, venture capital etc., thus diversifying and scaling up the private and public investor base to meet climate finance.

A collective effort is needed by all stakeholders — government, institutions, investors, exchanges, regulators etc. — to build a climate resilient nation by growing climate finance flows effectively. But this growth should be all encompassing, not skewed. Else the problem of the missing middle would creep up eventually, which would impact the scaling up of climate finance for India.

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