The transition of national economies towards green, sustainable economics has now become imperative. Governments, regulators, and private enterprises across the world are seized of this. We see an incremental implementation of de-carbonization measures and strategies aimed at greening not only manufacturing, service, and supply chains but also greening the financial systems while fostering green business opportunities.
Achieving a low carbon economy necessitates an intensive approach to financing the transition and focusing on hard-to-abate sectors. In India, we face very significant challenges in de-carbonizing hard-to-abate sectors without endangering industrialization. Since India is yet to peak in its emissions, circularity, energy efficiency, and material efficiency will be the key to its de-carbonization strategies. In heavy industries material efficiency and circularity can reduce carbon emissions by an estimated 40%, and short-term emissions can reduce by upto 20% (through improvements in energy efficiency). In the case of India, despite per capita emissions being below the global average, we are the third highest greenhouse gas emitter in the world.
Our power sector is the largest emitter. It is responsible for 37% of the total greenhouse gasses emitted in the country. Agriculture follows next with 21%, manufacturing is 17% and the transportation sector is 9%. The energy sector de-carbonization involves transitioning to clean energy sources. Achieving a transition will require substantial capital flows. Estimates say we would require cumulative investments of US$ 10.1 trillion by 2070 to meet net zero. The caveat is that currently tracked finance flows to the mitigation account for only about 25% of the total investments needed in India. These investments must be supplemented by policies and incentives that enable the adoption of more efficient and clean alternatives without hindering economic growth. In my view, there is very substantial potential for diverse sectors to collaborate, drive innovation, and tackle common challenges through shared knowledge, joint innovation, risk mitigation, and resilience planning.
Financing the transition will require a combination of green finance and transition finance. To clarify, green finance relates to financing those technologies that produce near-net-zero emissions and are aligned with the . An example is investing in roof-top solar or wind energy projects. Transition finance relates to finance for reducing emissions for hard-to-abate sectors. It typically allocates capital to companies and activities that are not green but are in the process of “becoming green” or reducing emissions, thereby emphasizing both inclusiveness and environmental integrity to avoid greenwashing. It caters to the requirements of hard-to-abate sectors that cannot be green in the short term due to a lack of green alternatives that are both economically and technically feasible. While green finance is a widely understood term, transition finance is newer and has multiple definitions. I believe we need a multi-faceted approach to address the need for green and transition finance. Our broad challenges are technical, economic, and institutional. Near zero carbon technologies occupy a niche with high costs and performance risks making them less competitive compared to established processes. Added to this is the fact that the risk-return profile of these technologies is difficult to justify because of their capital-intensive nature and long-term horizons. The perceived risks associated with these sectors compound the problem. On the institutional aspect, our capacities are weak, and public as well as private institutions often work in silos with little coordination.
We need an enabling ecosystem for the transition to low-carbon pathways. The second half of our challenges lie in policy, regulation, and markets. In the area of policy we require urgent timelines for transitions across sectors, this in turn requires policy push from the Government. The policies must include subsidies, and tax breaks, on the one hand and the other they should increase the demand for mandates such as renewable energy targets, public procurement programs, and consumer awareness campaigns. The regulators will have to build confidence (long-term policy commitments and transparent policymaking) among new players to invest in novel technologies. Policy levers will have to create an enabling environment, regulator support, and implementation. Regulators will form the second bedrock of this enabling environment. This includes setting standards, guidelines, and benchmarks for emissions, energy efficiency, and renewable energy integration, besides effective monitoring and evaluation. Finally, I think, market movement is equally critical. We need a cross-functional cross-sectoral approach to create models and pipelines that will attract and absorb capital.
The irony is that while there is capital available, there are no bankable projects or pipelines to direct that capital. We see that financial institutions are increasingly acknowledging the physical and transition risks that arise from climate change —- e.g. increasing risks of stranded assets from closed power stations or transport infrastructure. Despite efforts to keep pace with the growing need for green and transition finance, the uptakes are low. In India, so far, the tracked finance flows toward climate change mitigation are hardly a quarter of the total required. The increased ambitions reflected in the Nationally Determined Contributions (NDCs) and the commitment of India’s G20 presidency, should see financing flows increase rapidly. For this, the financial sector must get support and a push towards introducing new fiscal products while increasing the uptake of existing ones which align with green and transition finance. The spectrum of financial institutions including retail and investment banks, capital markets, insurers, and asset owners, operate under diverse contractual and regulatory environments owing to unique and individual characteristics – size, business model, sector coverage, fiduciary duty towards shareholders, etc. We must also ensure fair taxonomy.
Lack of it hinders not only the uptake of existing products but also the innovation of new ones. We should also quickly harmonize regulatory guidelines. The Reserve Bank of India has released draft guidelines, and the formal guidelines notification must follow. The insurance and pension fund regulators have yet to even issue draft guidelines. Only the Securities & Exchange Board of India (SEBI) has released ESG rating guidelines and the Business Responsibility and Sustainability Reporting disclosure framework (BRSR). Without a formal, integrated set of regulatory fiscal guidelines, we will continue to face challenges. Capacity building is yet another vital area. A formal and robust capacity-building system is required. Finally, I think we need to enhance our play in market-led innovations while ensuring adherence to guardrails and regulations, as well as the risk of greenwashing and transition washing. Innovations in fiscal mechanisms and structures will increase cash flows to both green and transition activities. Our current incentive structures do not support the levels of innovation required in the financial sector. This has to be corrected and supplemented by readily available concessional capital which is necessary to increase lending.
By Udit Garg, Managing Director & CEO, Kundan Green Energy
