Next week will mark an important shift from the Trumpian era when the new American president, Joe Biden, presides over a special meeting of world leaders to reshape the agenda on climate change. The renewed focus on climate change by the US administration comes amidst growing investor interest in green investments globally.
For India, this presents both a challenge and an opportunity. India will have to walk a tightrope between the demands of climate justice (much of global climate change is because of the past actions of developed markets) and the need to show commitment to a carbon-light future. The opportunity to make use of this push towards green investments can be realized only if financing constraints for renewable energy and other green initiatives can be eased.
Green finance flows in India amounted to ₹1.11 trillion and ₹1.37 trillion in 2016-17 and 2017-18, respectively, according to the Climate Policy Initiative (CPI), a policy analysis and advisory organization. That’s roughly 10% of India’s estimated annual requirement. The Indian ministry of environment, forests and climate change estimates the country will require ₹162.5 trillion (USD 2.5 trillion) from 2015 to 2030, or roughly ₹11 trillion per year, for effective climate action.
About 85% of this came from domestic sources, with private players such as commercial banks and corporations accounting for two-thirds of this. The remaining 15% originated from international sources such as foreign direct investment (FDI) and development finance institutions. Greater foreign investment would be key to India realizing its climate goals.
According to the CPI report, around 80% of the total green finance in the 2016-18 period was directed towards the power generation sector. This is in line with global trends. A further sub-sector classification reveals that solar power projects received nearly 41% of all funds in the two-year period, followed by wind energy generation at 23%.
Close to 8% of these funds were directed towards Mass Rapid Transit Systems (MRTS) projects such as the Metro rail. However, the CPI report notes that while the two fiscal years examined were not significant in terms of transportation projects, there is an upward trend in capital expenditure on MRTS systems by the central and state governments and greater investment is expected in this sector going ahead.
The central bank can play an instrumental role in steering finance towards green investments. This can be done by mandating climate-related disclosures by banks, directed and concessional lending towards green investment, and the establishment of green financial institutions. The Reserve Bank of India (RBI), as part of its green finance initiative, included the small renewable energy sector under priority sector lending in 2015. Yet, bank credit to the renewable energy sector remains dismal: 0.5% of total bank credit and 7.9% of total power sector credit. The RBI expects this ratio to improve as renewable energy gets adopted in greater measure in the coming years.
Green bonds are another popular mode of raising green finance. Since January 2018, India has seen about $8 billion worth of such bonds, a January report in RBI’s monthly bulletin said. Yet, that amounts to just 0.7% of all bonds issued in India. The RBI report said that green bonds are costlier because of greater risk perception and the higher upfront costs of green investments.
Companies and fund managers, too, are looking at this space with interest. From a corporate governance perspective, green finance is subsumed under the broader concept of sustainability finance. In addition to the environmental impact, this also considers the economic and social sustainability of a business. The resultant ESG (environment, social and governance) framework provides a formal mechanism to measure the sustainability and ethical impacts of an investment in a company. ESG, therefore, ties in with socially responsible investing.
In India, the NIFTY100 ESG index re-computes the weightage of the 100 companies in the NIFTY 100 by also incorporating their ESG scores. Between April 2016 and December 2019, the NIFTY100 ESG Index returned marginally more than the NIFTY 50. But since then that gap has widened, especially during the pandemic. With various environmental reforms being undertaken, globally and in India, companies with higher ESG scores could outperform over the long term.
What happens in the Biden meeting will have ramifications for both India’s energy policy and stock markets.
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