Financing the Green transition: initiative and challenges – Explained, pointwise

Introduction  

“Financing the Green Transition” is the cornerstone of the global shift towards sustainability. At the Paris Finance Summit, world leaders addressed the financial disparities impeding this transition, particularly for developing nations. Key initiatives included unlocking additional lending capacity and introducing taxes for polluters. Nonetheless, numerous challenges remain – mobilizing sufficient funds, aligning policies, and enhancing public awareness. Especially, in developing countries like India, issues like insufficient financing, lack of technology, and regulatory bottlenecks further complicate the journey.  

What is green transition? 

The green transition denotes a shift towards economically sustainable growth and an economy that is not based on fossil fuels or excessive natural resource consumption. Low-carbon solutions that encourage the circular economy and biodiversity are essential for a sustainable economy.  

The green transition might involve investments in clean energy production, circular economy solutions, hydrogen technology, and the introduction of various new services and operating models for businesses, the industrial industry, and municipalities. This bundle includes low-carbon roadmaps and sustainability initiatives developed by several sectors. 

The key elements of the green transition include – shift to renewable energy, energy efficiency, sustainable transportation, sustainable agriculture and forestry, circular economy, and green infrastructure. 

What is the need for green transition? 

Escalating impacts of climate change: The escalating impacts of climate change, as seen in the increasing number and severity of heatwaves, storms, floods, and wildfires worldwide, necessitate a green transition. These changes, highlighted in the Intergovernmental Panel on Climate Change (IPCC) reports, pose serious threats to human lives, livelihoods, and infrastructures. 

Fossil fuel depletion: The finite nature of fossil fuels and their impending depletion necessitate the shift towards renewable energy sources. Our current dependence on these fuels is unsustainable, and a transition to renewables is essential to secure our energy future. 

Economic vulnerability: The “New Climate Economy Report” from the Global Commission on the Economy and Climate highlights the economies vulnerable to volatile fossil fuel prices and the environmental costs of pollution.  

Public health crisis: Air pollution, primarily caused by burning fossil fuels, is causing a public health crisis, with millions of premature deaths each year. The World Health Organization reports underline the urgent need for cleaner, greener energy to improve air quality and protect public health. 

Loss of biodiversity: The alarming rate of biodiversity loss, as highlighted in the “Global Assessment Report on Biodiversity and Ecosystem Services”, demands an immediate shift towards more sustainable practices. Green transition is needed to halt habitat destruction and protect the myriad species that support ecosystem health and human survival. 

What are the various initiatives taken to finance the green transition? 

Initiative taken at international level 

The recent Paris Finance Summit focused on global strategies for financing the green transition. Here are some of the key initiatives 

Multilateral development banks (MDBs): MDBs are expected to play a significant role in addressing financial systems reform, addressing transboundary challenges, and increasing their resource allocation for developing countries. An additional lending capacity of $200 billion was announced for emerging economies at the summit. Apart from this, the World Bank announced disaster clauses for debt deals, that would suspend debt payment in the case of extreme weather events.  

Special Drawing Rights (SDRs): The International Monetary Fund (IMF) announced that the goal of 100 billion SDRs for vulnerable countries had been met. ‘Recycling’ SDRs from rich countries whose central banks do not need the cushioning, to poor countries who need them or MDBs who can channel them, has been proposed. 

Just energy transition partnerships (JETPs): A new 2.5 billion Euro JETP deal was announced for Senegal, with a consortium of countries comprising of Germany, France, Canada, the European Union, the United Kingdom, with the goal of increasing the share of renewable energy in installed capacity to 40 per cent of Senegal’s electricity mix by 2030. 

Debt restructuring and relief: Calls were made for a significant reduction in debt levels in developing countries, particularly debt cancellations for least developed countries. For instance, Zambia reached a $6.3 billion debt restructuring deal in debt owed to other governments including China. 

Polluter taxes: There was significant support for the imposition of taxes on polluting industries such as shipping. A financial transactions tax was also supported by several attendees. 

Carbon markets: The European Union unveiled a call to action on ‘Paris Aligned Carbon Markets’ with a goal of covering at least 60% of global emissions with carbon pricing mechanisms and allocating a proportion of revenues to climate finance. 

Climate finance goal: It was suggested that the long overdue $100 billion climate finance goal would be achieved this year. 

Initiative taken by India   

National Bank for Financing Infrastructure and Development (NaBFID): It is instrumental in addressing India’s infrastructure needs, notably through the National Monetisation Pipeline (NMP) and the National Infrastructure Pipeline (NIP). Emphasizing sustainable and climate-resilient development, NaBFID concentrates on projects that foster inclusive growth and sustainability.  

Net-zero targets: India, as a developing nation with growing energy demands, has set a goal of achieving net-zero emissions by 2070. This ambitious target involves balancing the amount of greenhouse gases produced with the amount removed from the atmosphere, promoting sustainability and climate resilience. 

Green growth as a budget priority: In a recent budget, the government identified “Green Growth” as one of its seven key priorities, emphasizing its commitment to promoting sustainable development and allocating resources accordingly. 

FDI in renewable energy: To meet the INR 1.5-2 trillion annual investment requirement in renewable energy, the Indian government has authorized 100% annual Foreign Direct Investment (FDI) for renewable power generation and distribution projects. 

Introduction of “Green Deposits”: The Reserve Bank of India has introduced guidelines for banks and Non-Bank Financial Companies (NBFCs) to accept “green deposits”. These funds are allocated towards environmentally sustainable projects, such as energy efficiency, clean transportation, climate change adaptation, and sustainable water and waste management. 

Business Responsibility and Sustainability Reporting (BRSR): SEBI has mandated the top 1000 listed companies in India to adhere to the BRSR framework, promoting transparency and accountability in their sustainable business practices. This framework helps in incentivizing green financing and allowing banks to estimate their climate-related exposure. 

ESG category of mutual funds: SEBI has introduced an Environment, Social, and Governance (ESG) category of mutual funds. The regulation allows asset management companies to launch more than one ESG fund, promoting environmentally conscious investing. 

Growth of Green, Social, Sustainability, and Sustainability-linked (GSSS) bonds: There has been a gradual expansion in the GSSS bonds market. Fitch ratings reports that GSSS-linked debt bonds accounted for US$ 20 billion in the Indian debt market as of January 2023, reflecting increasing private sector investment in green projects. 

What are the challenges to financing green transitions? 

Lack of robust green finance regulation: Without clear regulations in place, stakeholders, who rely heavily on conventional financial practices, may be hesitant to invest in green finance. 

Inconsistent policy and regulatory environment: The absensce of coordinated state and central government programmes can discourage investors. 

Financial health of distribution companies and utilities: Many of these companies are unable to make timely payments to renewable energy developers, which hampers the growth of the sector. 

Mismatch between investment timelines: Long-term green investments do not align with the short-term horizons of investors. 

Disproportionate investment in sectors and technologies: Certain sectors, such as wind energy, attract less international finance than others, like solar photovoltaics. 

Lack of consistent data and reporting systems: This makes it difficult to track finance flows, although the emergence of new databases may enable more efficient reporting and tracking. 

What can be done? 

Encouraging private investment: Regulations should be friendly towards private investors and businesses who are willing to invest in renewable energy projects. Reducing bureaucratic hurdles and ensuring a stable regulatory environment will also encourage more private investment. 

Leveraging international funds and partnerships: India could access international climate finance options such as the Green Climate Fund (GCF) and the Global Environment Facility (GEF). Bilateral and multilateral partnerships with developed countries can also provide financial and technical assistance. 

Improving financial mechanisms: Existing financial mechanisms need to be improved to increase funding for green initiatives. This could include green bonds, carbon pricing, and other innovative financing mechanisms. The central and state governments, along with financial institutions, can also provide low-interest loans and grants for green projects. 

Enhancing technological capabilities: Upgrading India’s technological capabilities is key to making the green transition cost-effective. This would involve investing in research and development (R&D), technology transfer, and capacity building. Collaborating with international partners can help access cutting-edge technologies. 

Fostering policy consistency: Policy inconsistency can deter investors and slow down progress. Therefore, there should be consistency and predictability in India’s energy and climate policies. 

Promoting public awareness and engagement: Raising public awareness about the importance of green transition and creating a societal demand for sustainable products can help incentivize businesses to invest in green technologies and practices. 

Sources: 

Sources: Down to Earth (Article 1 and Article 2), The Hindu Businessline, Politico and Business Insider