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Challenges and Solutions with India’s Climate Finance Eco-System

The 22nd session of the Conference of Parties, COP22, began this week at Marrakech, Morocco. Last year’s event in Paris set into motion a historic and ambitious commitment for countries to tackle climate change. Industries now better understand that business-as-usual doesn’t cut it any more. There are clear challenges, especially with regard to raising the required finance for implementation and scaling up. Broadly, this is known as climate finance.

However, there is significant debate around various aspects of climate finance, including the definition, the issues with addressing existing mechanisms for accounting, and the quantification of climate finance. On one hand, a business-as-usual scenario could limit future growth and make operational costs higher as companies deal with resource scarcity, uncertain energy costs, regulations, and shareholder scrutiny. On the other hand, compliance involves significant costs, for instance, investment and financial services provider, Barclay’s estimates that oil and gas companies stand to lose assets worth USD 33 trillion by complying with the Paris targets. These issues will continue to be central to the discussions at UNFCCC negotiations, and businesses and financial institutions now have an opportunity to innovate and mobilise funds where most needed.

What can businesses and financial institutions do?

In response to global concerns around climate finance, major public and private banks and financial institutions have made commitments on climate mitigation and resilience, echoing views expressed by businesses. There are three things that businesses and financial institutions can do to overcome the challenges faced:

Mainstreaming low-carbon portfolios:

Businesses and financial institutions, including private, public, and development banks, are taking conscious efforts, post Paris, to minimize risks associated with traditional investments. Moving beyond the traditional assessment of carbon emissions, this group can collectively work towards developing green investment and divesting from non-green investments. This can facilitate the development of the environmental, social, and governance (ESG) criteria necessary for mobilising green projects.

Internalising the cost of emissions:

Setting up a carbon pricing mechanism on emissions, internally and on investments, will help curb emissions. An increasing number of businesses are actively considering this. It helps translate emissions into business terms. WRI India’s work on internal carbon pricing helps businesses in the country set up and operationalise with a standardised approach.

Creating financial mechanisms and tools:

There are a number of initiatives, including corporate social responsibility (CSR) funds, that support transitions from a low-carbon pathway. WRI India’s flagship initiative, the India GHG Program, works towards creating an ecosystem that enables collaboration between financial institutions and businesses. It aims to support the creation of financial mechanisms that facilitate financing of green projects. Multiple tools can be created to cater to different markets and project needs, that include scaling up, seed funding, and expansion.

Developing a climate finance architecture for India

Engaging in discussions around climate finance requires a conceptual understanding of the various institutions and players involved. This framework will allow for a more nuanced mapping of existing flows, policy customisation, and access to project funding, and enable an outcome driven environment. A climate finance architecture can go beyond the conceptual mapping and look at the nature and volume of climate finance flows to and within India. This architecture should also collate fragmented information on funding agencies, instruments, and project level funding, to better identify, track, and access opportunities and information.

The gap between the bankable projects and lack of finance needs to be closed. The dearth of efficient project evaluation frameworks or ESG criteria to assess sustainability projects are a big challenge in mobilising finance for green projects. In recent years, green bonds have been gaining popularity, however, reaching out to micro, small, and medium enterprises (MSME) will require further innovation.

A clear framework will help financial institutions judge project viability effectively, and help project developers create business models that meet technical feasibility. What we need is to move climate action and its corresponding activities out of organisational boundaries, and into national level actions that include all sectors. Robust, low-carbon growth will bring about such a transition more rapidly, and help countries and individual players move forward.

This post was originally published on the India GHG Program website.

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