Our journey towards green finance is currently at the beginner’s stage. To emerge as a potential big player in this field, greening investments require efforts in terms of capacity-building, improving governance and new investment policies
That sustainability and economic growth are co-dependent is well-known. Green funding ie, financing environment-friendly activities and projects, can act as a catalyst to fulfil both. Hence, it is important to link the financial sector to make it responsive to climate-related concerns. Green funding can have two aspects — first, financial institutions ensuring (before granting any credit) that no project financed breaches current environmental standards. The second relates to preferring activities or projects that are climate-friendly ie, ones that reduce emissions or help cope with vagaries of climate change.
The “business-as-usual” scenario without achieving environmental goals may lead to loss of civilisation. Such a world will support a small fraction of the current global population, with many places (like the Gulf Cooperation Council) becoming unfit for living. However, there’s hope. A recent report by the Global Sustainable Investment Alliance shows at least $30.7 trillion is held in green investments, up 30 per cent from 2016. How did this happen? And how can we accelerate the same?
Greening investments require efforts in terms of capacity-building, improving governance and new investment policies. The current flow of capital to the green sector is mostly from the private sector, with many involved players largely directing capital to these causes, as per the inclination of the asset holders ie, people, whose money, various institutions like mutual funds and insurance companies invest. These asset holders are aware of the consequences of climate change and want the money to be invested so as to address the issue. The world needs a lot of capital to fight climate change. As per a report by the World Economic Forum, it would need an added investment of around $0.7 trillion per year to sustain the challenges posed by climate change.
The notion of green funding in India is very recent. However, within this short period, notable institutions like SBI, Axis Bank, Power Finance Corporation and a few independent power producers like Renew Power and Greenko have tapped dedicated green funds existing in the West by issuing green bonds. To scale up the efforts locally, a collective effort on the part of all stakeholders, including the Government, banks, institutions and regulators is needed to build a climate resilient nation via green funding. “Green banks” are considered to be a promising solution to develop green infrastructure markets. An obvious question that emerges here is: How can India unleash its potential?
Nearly 1,500 investors globally, with $45 trillion of assets under their management, have made public commitments to responsible investment. The benefits that directly emerge for investors allocating capital to green causes are — access to green assets/projects without higher project risk, achieving environmental and financial return on investment, compliance to green mandates, awareness and commitment to green growth, and deeper engagement with firms managing green issues. Undoubtedly, this hints towards investors with substantial corpus, who are active supporters of climate change. It is but natural that these investors have an appetite for green bond funding. It is to mop up funds from these sources that the Indian institutions mentioned earlier issued green bonds.
There is evidence that several developing nations like Bangladesh, Nigeria, Fiji and Indonesia among others have committed themselves to green financing. Nigeria, Fiji and Indonesia have issued sovereign green bonds. Given India’s existing emission trajectory, it is essential for us to tap green financing to ensure minimum emissions with greater resilience. The International Finance Corporation (IFC), a member of the World Bank Group, and Amundi, Europe’s largest asset manager, announced the successful launch of the world’s largest targetted green bond fund focused on emerging markets, the Amundi Planet Emerging Green One (EGO), in March 2018. With a $256 million cornerstone commitment from IFC, the fund aims to increase the capacity of emerging market banks to fund climate-smart investments. Subsequently, an announcement was made about IFC tying up with HSBC Global Asset Management to set up a similar fund targetted at non-banking segment.
How does India fare on attracting green investments?As per a report by Bloomberg New Energy Finance, India reserved the second position in global ranking in attractiveness for renewable sector investments, primarily coerced by its policy push towards increasing renewable energy. Further, it had the second biggest (2017) renewable energy investment market among all such climate-conscious economies, drawing $ 9.4 billion fresh funding.
Despite evidence of increasing private sector interest in clean energy and associated green investments, the scale of green investments has a lot more to cover. Closing this gap is our collective task. Development finance institutions like IFC and ADB among others may support by credit enhancements instruments like guarantee, besides investing in some key projects and help in slashing the overall cost of capital. The unified action of public and private funding leverages far greater capital flow, compared to standalone private sector finance.
India is trying to be a big player here. Nevertheless, more needs to be done. The launch of the Amundi Planet EGO can be an incentive to developing nations, including India. The long time scale and large size of the fund, which will actively invest in emerging market green bonds issued by financial institutions through to 2025, is expected to significantly increase the scale and pace of climate finance in emerging markets.
Further, consistent positions on financial policy and market intervention by Governments can help give confidence to both domestic and international investors. Similarly, consistent policy positions and support for green growth and environmental objectives will boost investors’ confidence in green funding.
A missing piece of the puzzle, however, is a substantial amount of dedicated green capital that exists locally in the Indian markets. This has started with dedicated green funds slowly finding their ground here. Currently, there are a few funds like GEF Capital Partners, Eversource Capital, which are dedicated to green causes. Recently, Avendus, a leading financial service provider, announced that it has launched India’s first ESG fund. Is India ready to launch a large “green fund” in which retail or even high net worth individuals are substantial contributors? Industry veterans are not positive about it. Then how do we get there? Clearly, greater awareness is the answer. The good thing is that the journey has already started. Still, more momentum is required to provide the desired impetus.
(Megha Jain is assistant professor, Faculty of Management Studies, University of Delhi and Sandeep Bhattacharya is projects manager, Climate Bonds Initiative (CBI), Mumbai)
