The financial sector can play a catalytic role in achieving our country’s environmental targets.
India is the fourth largest economy in the world and with a population of over 1.3 billion, the country’s environmental and developmental challenges are vast. The current GDP of USD 2.25 trillion will not be sufficient to meet India’s ambitious Nationally Determined Contributions (NDCs) and Sustainable Development Goals (SDGs), which are estimated to cost USD 2.5 trillion and USD 8.9 trillion, respectively, by 2030.
This calls for the development of new and innovative mechanisms for mobilizing climate and SDG financing and the channelization of such funds towards sustainable sectors and businesses which are geared not only to deliver on climate targets, but also meet the developmental agenda.
The Government of India has taken a lead in fostering future ready sectors such as renewable energy and energy efficiency, amongst others. These new economy sectors are at three distinct stages of development, requiring customized support and specialized interventions to deliver on the promise of low carbon emission. Financial institutions are uniquely positioned to play the role of sustainability catalysts, and accelerate the impact of these future ready enterprises.
Positive impact sectors like renewable energy have grown 350 percent over the last 10 years, backed by supportive government policies. These sectors have reached the competitive stage and would require incremental capital to help them reach a higher scale. To achieve financing at scale, there is an ardent need to build capacity and knowledge of Indian Banks to lend to this sector. New products like securitization of long term renewable assets would be able to draw low risk investments to the sector, allowing circulation of bank capital.
Energy Efficiency (EE) and Electric Vehicles (EV) represent sectors which are at an emerging stage with proven business cases but lack a clear understanding of the broader market. These markets need to be developed further by inviting new business players. EE alone is seen as a potential market worth USD 23 billion (INR 1.6 lakh crore) by The World Bank.
The Partial Risk Guarantee Fund for Energy Efficiency (PRGFEE) by the Bureau of Energy Efficiency (BEE) and the Partial Risk Sharing Facility (PRSF) by Small Industries Development Bank of India (SIDBI) have enabled financial institutions like YES BANK to extend EE loans through a credit risk guarantee. Similar guarantees may be extended for the EV sector to manage the perceived risk. Extending the priority sector status to these industries could be the next major reform towards sustainability.
Climate adaptation, with projects that link local, environmental and social elements, could be classified as a nascent stage sector which may not yet have clear risk or return profiles. Financial innovations like blended finance could be used to leverage grant funds from public and CSR sources to reduce risks and increase viability of these projects through specific interventions.
For example, Yes Bank piloted an innovative, blended finance project towards promoting environmentally sustainable livelihoods among 600 under-privileged women salt farmers in Gujarat. The instrument uses CSR funds to reduce the cost of capital for the farmer through lower interest rates, in addition to providing risk guarantee to the lending financial institution as a safety net against loan defaults.
Such instruments may be leveraged for designing new projects in forestry and Integrated Watershed Management (IWM), which despite being small today could have a high impact on climate change and sustainable livelihoods.
Given their central role in the economy, financial institutions have an opportunity to lead India’s transition towards an environmentally sustainable and a climate resilient economic powerhouse. By infusing capital into green sectors and devising innovative financial solutions for these businesses, they can contribute towards achievement of India’s national targets and create innovative pathways to sustainable development.
Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.