ANIRUDH SURI
In November 2022, at COP27, India submitted its Long-Term Low Emission Development Strategy (LT-LEDS) to the United Nations Framework Convention on Climate Change. This long-term strategic transition, by various estimates, will require not billions, but trillions of dollars of investment. Yet India currently lacks a comprehensive climate finance strategy for mobilizing the capital required to execute on the LT-LEDS. A piecemeal approach to attracting the capital required will not work.
What should be the key pillars of India’s climate finance strategy? This article argues four key pillars must underpin India’s climate finance strategy: private sector mobilization, international institutions and partnerships, a blend of financial instruments, and innovation finance. Each of these pillars is outlined below.
PILLAR ONE: PRIVATE SECTOR MOBILIZATION
India must mobilize much more private sector capital than public financing. Despite having publicly committed to mobilize $100 billion per year by 2020 in support for vulnerable countries coping with climate change, Western governments have repeatedly cited their own domestic fiscal pressures and expressed their inability to fund the climate transitions of developing countries. India has argued that, given rich countries’ historical contribution to carbon emissions, this is a shirking of their responsibility. It has advocated strongly for the principle of common but differentiated responsibilities and respective capabilities, which holds that developed countries have more responsibility for climate mitigation than developing countries do.
However, India cannot afford to delay investing in its own climate transition. Even as it continues to put pressure on Western governments to meet their moral and financial commitments, India must also realize that the solution lies in mobilizing resources in the private sector. The private sector is not just better placed, but also much more willing to step in. Large corporations and financial firms increasingly view the climate transition as a once-in-an-era economic opportunity and not as a moral or ethical challenge.
UN climate envoy and former Bank of England governor Mark Carney has termed the climate transition “the greatest commercial opportunity of our age.” Blackrock CEO Larry Fink has stated that the next trillion-dollar companies and the next one thousand unicorns will be in the climate space. Many other private equity and venture capital investors have expressed a similar view. Bill Gates, for example, has also asserted that Microsoft, Google, and Amazon–type companies will come out of this space.
Companies such as Shell and BP that have benefited from the fossil fuel–driven economy have similarly realized that they need to transition to the clean-energy or renewables-driven global economy. They are beginning to invest billions accordingly in clean technology sectors such as electric vehicle charging infrastructure, biofuels, renewables, carbon capture and storage, and green hydrogen. Indian conglomerates such as Reliance, Adani, and Tata are similarly investing in electric vehicles and green hydrogen. All these statements and investment commitments are reflective of the shift in the private sector’s mindset (though recent record profits have caused major oil and gas companies to pull back a little on climate investment amid accusations of greenwashing).
Given this shift in mindset, what can India do to attract the private sector capital available globally for climate technology? First, India must be clear that the climate transition offers it an opportunity to leapfrog from legacy technologies to cutting-edge ones. The benefits of India’s rapid growth in the telecommunications revolution have been evident over the last two decades, in terms of both the development of major telecom corporations and, more importantly, the seeding of the internet-driven startup revolution in India.
The climate transition offers India a similar opportunity to technologically advance across multiple sectors—smart and decentralized grids, energy-efficient green buildings, infrastructure, mobility, energy generation, and agriculture. India has the opportunity to build many of the trillion-dollar climate companies and unicorns that Larry Fink and others have spoken about, if the country focuses on it and enacts enabling policy frameworks right away.
Moving early to establish leadership in emerging climate technology will be crucial if India wants to be truly a leader in this new economic revolution, as I argued in my book The Great Tech Game. For that, India must de-risk the investment climate for climate. The country must establish enabling policies in each of the key subsectors to allow transitions to happen quickly—like, for example, the National Green Hydrogen Mission, which has incentivized Indian corporations to invest in green hydrogen capacity at about the same time as others in the world are doing so.
The quicker these transitions are enabled in India, the more likely the first mover advantage will accrue to Indian companies and innovators. On the other hand, if India moves slowly to de-risk innovation in these subsectors, the first movers will inevitably be established elsewhere.
A decade from now, it’ll be too late. If large companies get established across the world in each of these subsectors, India will remain a consumer and licensor of these technologies—not their producer or owner. And that will mean higher financial costs over the lifetime of these technologies for India’s companies and people.
PILLAR TWO: INTERNATIONAL INSTITUTIONS AND PARTNERSHIPS
The second pillar—making use of international institutions and partnerships—will be equally important. Multilateral institutions and international development banks such as the World Bank, International Finance Corporation, and Asian Development Bank must be reformed and their focus reoriented to prioritize affordable climate finance solutions for countries like India.
In recent years, multilateral development banks (MDBs) have increased their allocations to climate finance. But there is broad consensus that their investment portfolios, investment criteria, and priorities need to be further aligned with overall climate finance goals. The World Bank needs to revisit its financial risk models and leverage greater private capital. Reports from many of these institutions, including the IMF, Brookings, and the Center for Global Development, have also explored various solutions for leveraging MDBs and international financial institutions to mobilize greater private sector climate finance.
Already, key stakeholders are pushing for such reform. In October 2022, as part of its G7 presidency, Germany (together with the United States and other key shareholders) proposed various fundamental reforms for the World Bank to address the global climate challenge. India’s finance minister, Nirmala Sitharaman, has similarly used India’s G20 presidency, which began in December 2022, to emphasize MDB reforms to facilitate greater concessional finance to developing nations such as India while taking the lead in international coordination for debt restructuring.
India must leverage its bilateral relationships with key stakeholders in these institutions—including the United States and the EU—to prioritize MDB reform. Bilateral initiatives such as the U.S.-India Climate Action and Finance Mobilization Dialogue should be leveraged. At the same time, India’s G20 presidency offers the perfect platform to raise this to the top of the global agenda. Various Indian professionals who have worked at senior levels in these institutions should be brought on board to help expedite this process.
MDBs will be crucial as they can help bring down the cost of project finance to lower rates than are being achieved otherwise through regular debt instruments. These institutions can help establish multi-sovereign loan guarantees to improve the creditworthiness of green projects, and thus reduce risks and costs. But India must also do its part to de-risk its projects by aligning policy and regulation to achieve better, smoother implementation. These projects should be made compliant with emerging standards for climate risk disclosure and reporting frameworks, such as the Task Force on Climate-Related Financial Disclosures or others that may become the global standard.
Similarly, India must have an eye on—and a seat at the table in—new institutions and mechanisms emerging globally that will govern the flows and standards around climate finance and climate technologies. International institutions will be critical, for example, in bringing countries together to establish frameworks for standards and price discovery mechanisms for new emerging technologies and markets such as carbon offsets, green hydrogen, and carbon capture.
New financial networks such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) have already been established to bring together central banks and financial regulators from over 120 countries, including the Reserve Bank of India. The NGFS seeks to better manage risks and reduce the cost of capital needed for low-carbon investments. But it still remains a voluntary platform for sharing practices, and not a platform that would actually commit the central banks and regulators to mandatory changes in policy for “greening the financial system.” The Finance Stability Board, recognizing the climate-related financial risks to global financial stability, has also put out a road map for international coordination on consistent financial disclosures, data-sharing, vulnerabilities analysis, and regulatory approaches.
It is critical that India is at these decision-making tables and has a clear ask from these institutions: enable cheap climate finance for India’s transition and ensure that the standards being set at these institutions are aligned with India’s needs.
PILLAR THREE: BLEND OF INNOVATIVE FINANCIAL INSTRUMENTS
The third pillar of India’s climate finance strategy will be finding the perfect blend of financial instruments—equity, debt, bonds, grants, philanthropic capital, and blended finance instruments—to make this transition affordable and just. Innovative climate finance can not only help bridge the gap between available financing and India’s needs, but also unlock significantly higher private investment and reduce overdependence on debt as the primary financing instrument. These innovative instruments can include pooled investment funds, layered risk funds, credit guarantees, debt-for-nature swaps, sustainability-linked bonds, green revolving funds, and green bonds.
India’s maiden issue of green bonds, within the broader green bonds framework outlined by the government, is a good start but is clearly not enough. India may issue $3 billion of green bonds in financial year 2023–2024, but still this will amount to only 1.6 percent of its overall annual borrowing. Moreover, the cost of capital needs to be brought down much more to make the transition affordable.
Private sector players—including auto manufacturers, financiers, OEMs, and others—should also leverage the bonds market as well as instruments like asset-backed securities to further free up their balance sheets and reduce their cost of capital. Similarly, states and cities—not just the central government—should independently access the bonds market where feasible to lower their transition costs. This is beginning to happen already. For example, Indore Municipal Corporation raised 7.2 billion rupees (approximately $87 million) through green municipal bonds. The issue was oversubscribed 5.91 times, demonstrating high interest in such bonds. More cities and states need to follow this example.
Blended finance—the strategic use of development finance or philanthropic capital to attract greater private capital for key objectives—must be a part of the strategy. Blended finance instruments include grants, guarantees, concessional or subordinate debt, and equity. These instruments would allow development finance institutions such as the World Bank and major philanthropists—with higher tolerance for risk and access to patient capital—to instill confidence in, and adjust the risk downward for, private capital.
To scale global expansion of such innovative climate finance, three hurdles need to be overcome: the limited number of bankable green projects in any country, the absence of a standardized global policy framework, and the absence of a global marketplace for climate finance deals. India must push for these gaps to be solved through a combination of national and international action.
PILLAR FOUR: FINANCING CLIMATE-FOCUSED INNOVATION AND R&D
The fourth pillar of India’s climate finance strategy must be funding climate-focused R&D and innovation. Many of the technologies needed to address the climate challenge have not been commercialized yet, while some others presumably haven’t been invented yet. India will need to ensure that this time around it is not just a buyer or consumer of technology invented outside the country. India must not always be catching the tails of technology waves.
Rather, it must be a developer of at least some of the technologies that will facilitate an equitable and just transition. These technologies—electric vehicles, battery storage, renewable energy, carbon capture and sequestration technology, smart grid technology, green steel and cement, smart agriculture, and others—must be developed and tailored for the Indian market. And India must also aim to be a provider of these technologies to the world.
Startups must necessarily play a role in this. India must leverage its dynamic and robust startup ecosystem in its climate transition, and not rely entirely on its large corporations. The climate tech venture capital funding in India over 2016–2021 stood at a miniscule $1 billion by some estimates, compared to approximately $15 billion in Europe, $20 billion in China, and almost $50 billion in the United States. Therefore, it is important that the climate tech venture capital ecosystem in India be given a boost. Globally, climate tech venture funding stood at historic highs in 2022, with almost eight in ten investors (according to one PWC survey) looking to increase their investment in climate-related ventures. The last two years have seen 25–30 percent of overall venture capital funding going to climate tech startups. Venture capital firms in India must also shift their focus in this direction.
The startups in India’s climate tech ecosystem should attempt to solve hard technological problems at the same time as—not a decade or two later than—their American, European, and Asian counterparts in this space. For this, the existing venture capital ecosystem will undoubtedly step up, but will need a more robust R&D ecosystem to develop in India. Entrepreneurs should be able to tap a wide range of technologies and research being done in research institutions and help commercialize and scale them.
For the innovation approach to succeed, therefore, India’s climate finance strategy must include another pillar: a clear, significant increase in the R&D spend allocated to climate-related research. India is lagging behind its peers—and all the technologically advanced nations—with R&D spend at a meager 0.7 percent of its GDP. To correct this, India’s private and public sectors must find ways to finance the core R&D that will be required for India to be a leading climate tech nation.
The country must also leverage its global partnerships with key friends such as the United States, Japan, and Europe to build its R&D ecosystem to match global standards in all respects. Joint collaborative research, institutional exchanges, cross-pollination of talent, and access to public funding for R&D from other nations will all help pull India up in this regard.
THE WAY FORWARD: APPLY THIS FRAMEWORK TO EACH ELEMENT OF THE LT-LEDS
The core elements of India’s LT-LEDS framework—such as greater renewable energy contribution to India’s overall requirements, increased use of biofuels, greater electric vehicle penetration, improving energy efficiency through the Perform, Achieve and Trade scheme, a threefold increase in nuclear capacity, and development of green hydrogen manufacturing capacity—have already become clear. Yet other pieces of India’s net-zero strategy will evolve over the coming months and years, as technologies become cheaper and the appropriate paths to net-zero in various sectors of the economy become clearer.
To execute on the LT-LEDS, India needs a comprehensive climate finance strategy built on the four pillars outlined above. These pillars should be applied to finance each of the elements outlined in the LT-LEDS document, and to any other elements that may be identified as India’s net-zero strategy evolves.
A piecemeal climate finance strategy will lead to a slower-than-planned climate transition, not to mention the lost opportunity to become a green superpower. A holistic strategy, on the other hand, will help India maximize access to affordable, timely capital for the projects, technologies, and enterprises it needs to speed up its climate transition.
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