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In a world teetering on the brink of climatic catastrophe, every resource needs to be directed towards transitioning to a sustainable future, and “every finance, every investment should be climate finance” aptly stated by Mr. Auguste Tano Kouame, India Director of The World Bank. Today, India stands at a crossroads, facing the critical choice of either finding the necessary resources or succumbing to the impacts of climate change. The nation is grappling with the daunting task of adapting to the irreversible damages of climate change while setting its sights on achieving updated 2030 Nationally Determined Contributions (NDC) targets. However, a challenge of this scale and urgency demands mobilization of a staggering $170 bn to $200 bn per year in climate finance. Alarmingly, only 30% of this need is currently being met today, leaving an annual shortfall of at least $120 bn on an average—-a gap that continues to widen with each passing year.
The ramifications of this financing gap are nothing short of dire. Without urgent and substantial intervention, India risks falling short of its 2030 NDC targets. Emissions could soar to an alarming 5.6 GtCO2e per year, far exceeding the targeted cap by a whopping 1 GtCO2e. This trajectory would spell disaster for a nation already ranked 7th among most climate-vulnerable nations in the world. With a population exceeding 1.4 billion, where 80% reside in highly climate-vulnerable districts, the stakes could not be higher. However, in comparison to the stakes, investment for climate action has not been remotely proportional. If this trend continues, five of the top 10 high emitting states – Uttar Pradesh, Maharashtra, Karnataka, Odisha, and Tamil Nadu – will alone lead to 2-2.5 GtCO2e or 40 to 45% of the country’s annual GHG emissions. India desperately needs swift, smart, and robust support to avert severe impacts. The clock is ticking, and without rapid climate finance acceleration, the consequences will be catastrophic.
India’s call for climate finance has echoed through the halls of international forums, with the Indian government demanding at least $1 trillion annually from developed countries for climate actions in developing nations, up from the previous global call for $100 billion per year. This significant increase reflects the widening gap, and the new realization of the extensive impact climate change will have on developing nations. Yet, this monumental goal remains elusive, hindered by three main issues around lack of a globally adopted climate finance taxonomy, regulatory and capability limits on fund absorption capacity, and misalignment of project needs with fit-for-purpose financing instruments.
Disputed Dollars: The Murky Waters of Climate Finance Reporting
The very first step in addressing climate finance is defining it—a task mired in global debate. The discussion of defining it often meets roadblock at every COP year after year, with the Standing Committee on Finance (SCF) struggling to reach a common consensus due to varying priorities of different stakeholders. Consequently, the climate finance taxonomy remains convoluted even after decades of efforts. The current adopted taxonomy for climate finance fluctuates based on donor, recipient, region, project type, and funding nature. The core challenges in defining climate finance are many.
Ambiguities around, particularly whether climate finance should refer to “committed funding” or actual “disbursed amounts” crossing borders each year. This discrepancy fuels international disputes over climate finance figures. For example, while the OECD reported global climate finance reaching $62 billion in 2014, the actual cross-border flow was a mere $2.2 billion. Another fierce debate centers on whether climate finance should be “new and additional” or reflect broader overall project costs. Additionally, the lack of adoption of a unified framework among DFIs and MDBs for defining the relevance level of each project as climate finance, combined with varying levels of transparency and data requirements, complicates tracking and reporting. Many argue that changing definition in many cases seems like syphoning off ODA capital from other essentials. Each financial institution has its own tagging mechanism, often leading to inconsistencies in how funds are classified and reported. The OECD report subtly mentions, “year-on-year variations in the thematic split of climate finance can be influenced by… methodologies used by providers to identify the climate theme of activities and determine their climate-specific amount.”
Moreover, the absence of a clearly defined accounting methodology for private finance further muddies the measurement of mobilized private capital, which is critical for meeting and measuring the global target of raising a quarter of the $100 billion from private sources. Though the recent OECD data states that developed nations were able to mobilize $115 billion, crossing the crucial goal of $100 billion with a contribution of approximately $22 billion from private finance—far less than the target of achieving a quarter of the financing from the private sector—it leaves a doubtful picture about this fund raised, when a caveat like the following are added to sub notes: “There is a need to further improve data disclosure and transparency on accounting methodologies relating to public climate finance and the private finance it mobilizes.”
These definitional ambiguities pose monumental challenges for India, threatening to fracture the nation’s economic and social fabric. Overestimations of committed versus disbursed funds and confusion over whether funding is new and additional create false optimism, underestimation of project timelines, and, in many cases, deter potential funders to avoid overfinancing. The different tagging mechanisms with varying transparency levels used by financial institutions bring additional financial and operational burdens. These complexity in tagging necessitates extensive training for government officials. By design, most programs set aside technical assistance funds as grants for the capacity development of officials, yet the capacity to manage such programs continues to be an area of gap, resulting in lost efficiency in creating per dollar impacts and raising questions about the complexity of these tagging mechanisms.
Moreover, tracking and reporting of climate finance progress get marred by ambiguity, eroding accountability and trust, deterring private investment crucial for scaling climate initiatives. And Lastly, the lack of clearly defined type-of-data required for accessing climate finance remains unclear, trapping the nation in cycles of inadequate information and missed opportunities while trying to access these funds with labyrinth data ask, slowing the application processes and delaying vital climate action. Government officials, grappling with this complexity misses the opportunity because of lack of capability to navigate varying application requirements, and even finds it complex in drafting suitable policies, stalling the overall states progress.
Lost Potential: The Need to Streamline India’s Framework to Maximize Climate Finance Absorption
However, even if we find a common definition for climate finance, significant deterrents exist on the demand side of limited fund absorption capacity and on the supply side of perceptions and inefficient funding structure.
On the demand side, firstly, the capacity to manage and allocate funds vary significantly across states. Government agencies often lack the skilled personnel and resources needed to identify, design, and manage impactful projects, making it difficult to absorb and deploy available funds effectively. Secondly, state-level political instability, with frequent changes in government and complex institutional structure which differs from state to state, leads to altered or halted initiatives, making long-term planning impossible. This volatility causes donors to worry about project continuity, limiting funding to smaller, short-duration projects that do not fully utilize available finance. Thirdly, strict fiscal deficit targets further constrain states and the central government to absorb debt. While responsible fiscal management suggests keeping the fiscal deficits below 3% of GDP, most states’ deficit ranges between 4% to 8%, with only four states within the limit (averaged over 2019-2022). This fiscal straitjacket hinders the ability to borrow additional funds for climate projects.
Furthermore regulations, on the utilization, reporting, and measurement of foreign contributions and foreign aid to institutions create administrative burdens and potential legal risks, deterring international donor funding for sectors like Climate. Lastly, without a single nodal agency for climate finance at the center and state level, obtaining clearances and regulatory approvals becomes a cumbersome, multi-agency ordeal, causing delays that increase project costs and complicate fund absorption.
On the supply side, India’s classification as a lower-middle-income country has slowed the flow of funds, raising the question of whether climate finance should be tied to economic status. Additionally, the supply of funds is not efficiently leveraged in India. The leverage of concessional finance in India is less than 2X, whereas the global average exceeds a multiplier of 4. This discrepancy prompts the question of why financial instruments in India are not attracting more private capital.
From both demand and supply side perspectives, India’s strong global economic and socio-political stance present a massive opportunity for pro-climate investors to create transformative sustainable impacts at scale and ensure steady returns, while creating a model that can be replicated to showcase decoupling emissions and growth. However, given the lack of a comprehensive and robust framework to absorb international funding, India has not been able to emerge as a haven for global climate impact investors.
Traditional Models vs. Climate Needs: India’s Struggle for Appropriate Financing
Even if India identifies ways to absorb climate finance funds, it faces another significant hurdle: the misalignment of project needs with fit-for-purpose financing instruments. Traditional risk-return models guide capital allocation in typical markets, but the climate finance sector demands rapid and substantial investment. To expedite this, India must innovate financing tools that not only reduce perceived risks but also offer attractive returns to investors.
A significant challenge lies in designing or identifying a pipeline of relevant programs and projects in climate that will have a substantial impact and can be financed. Imagine having ample funds on the table but lacking enough viable projects to invest in. Secondly, while India desperately seeks funding for specific sectors, it must fit the mandates of various funders, further complicating the financing landscape. Moreover, with low investment in innovation and evidence generation India lacks confidence from the funders on potential “Impact return on investment”. What accentuates the situation is that each state has different institutional structures that may absorb funds for projects. The legal framework itself makes it hard to match the right instrument to the project. For example, the “fully independent company” may be able to fund via equity or its derivatives, while a “society” may only be able to fund projects via grants. Additionally, timing plays a crucial role; the right type of funds must be available at the right time, aligning funders’ timing with the project’s needs and the suitable instrument in the correct location.
Lastly, the biggest gap is the inability to design smart funding models that can mitigate globally perceived risks. Without innovative financial structures blending different types of capital, many high-potential projects remain unfunded. We need individuals with the capacity to leverage the unique advantages of each type of capital. For example, philanthropy provides patient capital for research and pilot projects in emerging sectors, while debt finances mature markets with predictable returns. Equity investment propels mid-stage ventures toward scalability. The intricate dance among philanthropy, equity, and debt is essential to provide smart capital that adapts to varying degrees of risk and potential. This requires individuals capable of sophisticatedly blending these capitals, as well institutional capability to accommodate these new funding sources and instruments. And while India has taken a few steps forward, these financial innovations must become even smarter and be adopted across India at scale to make a significant impact.
Forging the Future: India’s Revolutionary Role in Global Climate Finance
As one of the largest economies in the Global South, India has an opportunity to lead this region in unlocking finance, specifically tailored to Global South’s climate needs. India must step up and address issues related to the lack of a common climate finance taxonomy, regulatory and institutional arrangements on fund absorption capacity, and the misalignment of project needs with fit-for-purpose financing instruments.
With its current stable economic growth trajectory and diplomatic prowess, India could establish its own climate finance taxonomy and set an example for the Global South and the world. Climate action can no more be taken up at the country level alone; grassroot measures at state and district levels will be crucial to help India reach its 2030 and 2070 goals. Hence, India’s taxonomy efforts should adequately factor in access to finance for subnational climate action too. Ensuring traceability and impact of each dollar of investment into India as climate finance would be key for establishing transparency, improve efficient delivery and attract enhanced investments.
India can spearhead the innovation of financial solutions that enhance the absorption of new funds, leveraging its robust banking sector and growing financial stature to attract top global talents. As international banks increasingly seek investment opportunities in India, the country is perfectly positioned to capitalize on available funds. Moreover, India should set an example of allocating resources appropriately between adaptation and mitigation efforts, addressing the current imbalance favoring mitigation.
Harnessing its entrepreneurial excellence—the third largest in the world—India can develop innovative solutions to climate finance challenges, creating a robust climate investment project pipeline not only for itself but for the entire Global South. This initiative would spotlight Indian innovators. By virtue of being agile, startups can provide faster implementation while also helping them expand their geographical reach, boosting ‘Make in India’ goals.
Additionally, India’s role as the first responder in its neighborhood bolsters its position to lead the Global South and instills confidence in global philanthropists to participate in India’s initiatives. This philanthropic impetus can help India craft frameworks for national nodal taxonomy institution, leverage talent, and support the creation of smart financial instruments. Philanthropy can also establish institutions to effectively absorb and implement international aid, advocate for regulatory ease, train government officials, and promote evidence-based practices.
Patient capital can be the linchpin in bridging the climate finance gap for the Global South. Remarkably, a single dollar from philanthropy, if strategically implemented, could catalyze 6 to 8 times the amount of concessional finance, which in turn could leverage four times the amount of private capital. This patient capital can thus accelerate substantial financial flows needed for climate initiatives.
With its financial and technological edge, India is poised to pioneer scalable, replicable and implementable pro- climate actions. India can become the epicenter for climate action of the Global South, amplifying its voice in international climate negotiations and advocating for just, equitable and effective climate finance mechanisms.