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India’s net-zero target investments must go beyond Corporate Social Responsibility (CSR) efforts from the private sector. As per the Companies Act 2013, companies must undertake not-for-profit social welfare activities under the CSR vertical. As per the Ministry of Corporate Affairs data, most Indian CSR projects are undertaken in the education, health, sanitation, and rural development sectors. Beyond the need to fulfil the responsibilities of these socio-economic issues, another looming issue is climate change and its uncertain and precarious impact. The Indian government has pledged its Nationally Determined Contributions (NDCs), and the Indian private sector has joined in in this national commitment and individually set its emission reduction targets to tackle climate change. By 2030, India needs US$ 1.05 trillion to meet its NDCs to the United Nations Framework Convention on Climate Change (UNFCCC). Since funding of this scale is not feasible from just governmental efforts and the minuscule financing power of CSR, private financial participation with an economic motive and incentive is crucial for fulfilling India’s net-zero targets by 2070.
The Indian government has pledged its Nationally Determined Contributions (NDCs), and the Indian private sector has joined in in this national commitment and individually set its emission reduction targets to tackle climate change.
India is highly vulnerable to climate change, and finances must flow towards adaptation and mitigation activities. Annually, India needs US$ 85 billion for mitigation finance and US$ 14-67 billion for adaptation finance. According to the analysis and advisory organisation Climate Policy Initiative, India had climate finance of US$ 45 billion in 2023, which is insufficient for achieving its phase 1 NDCs by 2030. Very typical of South Asia, India has been prominently executing mitigation finance projects rather than adaptation finance projects. Only 5 percent of the adaptation projects in South Asia financed by the public sector were adaptation projects. The UNFCCC’s New Collective Quantitative Goal (NCQG) will likely be the central point of negotiations at the Conference of Parties (COP) 29 in Baku, Azerbaijan, to be held in November 2024. It is crucial for developing economies to secure adequate international funding as they lack sufficient domestic capital to build climate-resilient infrastructure. This substantial shortfall in climate investments necessitates unlocking the private sector capital and its potential to bring about constructive and positive impact.
As per the Economic Survey 2024 conducted by India’s Ministry of Finance, the country must allocate 5.6 percent of its annual gross domestic product (GDP) for climate adaptation and mitigation. The Indian government must pitch climate change as a once-in-a-lifetime economic opportunity by creating a sound regulatory environment to attract capital from private players for climate adaptation and mitigation projects. By combining concessional capital with private investment, blended finance mitigates risks. It attracts private capital, effectively bridging funding gaps and facilitating a smooth climate transition, making climate projects more attractive to private investors.
What is blended finance?
Blended finance is a strategic financial collaboration between the public and private sectors, Development Finance Institutions (DFIs), and Multilateral Development Banks (MDBs) to unlock private capital to address climate financing gaps. Blended finance reduces financial risks, particularly for institutional investors, by deploying public capital as technical assistance, guarantees or first-loss capital.
Blended finance pools capital from two significant investors:
- Institutional investors (banks, insurers, venture capital)—invest high capital at market rate in low-risk and profitable projects.
- Concessionary investors (philanthropies, foundations)—invest low capital at concessional rates in high-risk projects with low market rate of return in the immediate future.
Blended finance reduces financial risks, particularly for institutional investors, by deploying public capital as technical assistance, guarantees or first-loss capital.
DFIs/MDBs combine capital at market and concessional rates for climate-resilient projects and provide technical assistance and advisory services from project shortlisting to success. DFIs/MDBs, through capacity building, monitoring, and evaluation practices, yield economic benefits for private investors to further boost investments in climate-resilient infrastructure.
The evolution of blended finance in India
India has seven key milestones in blended finance, concomitant with climate mitigation initiatives. These are as follows:
Source: Authors’ compilation
Challenges for blended finance in India
There are considerable knowledge gaps about blended finance. Its precise government-recognised definition, implementation, and operationality are absent in India, which has added to the information asymmetry. As blended finance brings different entities from various specialised domains, the lack of interdisciplinary domain knowledge for the implementing authorities adds to the structural complexities.
There is no clear regulatory regime established for investing in for-profit climate infrastructure. A few blended finance projects by MNCs are deployed under the CSR vertical, primarily focusing on not-for-profit activities. High project costs and complex project structures in blended finances make it unattractive for investors. Since there is no apparent financial pathway under CSR for climate-resilient infrastructure, private firms are hesitant to invest capital in climate infrastructure and choose safer investment projects like health and education. The lack of regulatory authority widens the knowledge gap among private players and leads to more financing gaps. Without a regulatory framework, investors view blended finance projects as high-risk, deterring capital deployment due to perceived low returns. Despite their willingness, philanthropic and private players cannot deploy capital for climate initiatives due to the absence of a regulatory authority.
Policy recommendations
There is a tremendous need to sensitise the stakeholders of NDCs about blended finance. This sensitisation can be supplemented by capacity building for all government authorities, private players, and other stakeholders to understand—the meaning, instruments, and operationality of blended finance projects. This process involves training and equipping these institutional officers with the necessary skills and knowledge to manage these complex financial arrangements. The authorities must have a thorough knowledge of climate finance transmission channels and project risk assessment before approval. Institutional capacity for officers from the Ministry of Environment, Forest, and Climate Change (MoEFCC) and Ministry of Finance (MoF) building is crucial for implementing and succeeding blended finance projects in India. Government authorities must understand and seamlessly implement blended finance transactions for investors.
Institutional capacity for officers from the Ministry of Environment, Forest, and Climate Change (MoEFCC) and Ministry of Finance (MoF) building is crucial for implementing and succeeding blended finance projects in India.
Establishing a financial regulatory regime for climate verticals in addition to CSR will allow knowledge exchange for blended finance and expand the application of current CSR instruments. Engaging in blended finance transactions reduces risk for private investors by addressing market uncertainties. This encourages private sector participation in projects that might otherwise seem risky, unlocking more investment and funding essential infrastructure.
A green taxonomy (environmentally friendly investments) online platform should be created for investors. This platform should provide investors with crucial investment information about climate-resilient project opportunities and will increase transparency. In addition, public data on state-wide risk assessments should be published on the MoEFCC website to enhance transparency and address information asymmetries among multiple stakeholders. The public data will also provide avenues for new project exploration in climate-vulnerable states for investors to upscale investments and enhance capital mobilisation.
Establishing an inter-ministerial climate finance institution under the MoEFCC co-led by MoF with a mission to attract capital from private, philanthropic actors, MDBs, and DFIs for climate-resilient projects to bridge funding gaps. Under the climate vertical, MoEFCC should ensure project operationality, and MoF must approve multi-stakeholder projects prior to inauguration. The institution can also work towards creating stakeholder awareness of the economic opportunities offered by blended finance projects. The institution can also offer project advisory services to align with investor and stakeholder requirements for new projects.
The institution can also work towards creating stakeholder awareness of the economic opportunities offered by blended finance projects.
As seen over the years, the lack of adaptation infrastructure has caused tremendous disasters across India each year. As India approaches COP29 in Baku, Azerbaijan, in November 2024, it must advocate for a national and eventually global climate capital deployment regulatory framework for private corporations. Unleashing private capital is crucial to rebuilding climate adaptation for each state based on its unique geographical needs. By focusing on institutional capacity building and establishing a robust green taxonomy to create a conducive environment for new investments from the private sector, India can attract more investment to advance its NDCs efforts and meet the target.
Amruta Veer is an Intern at the Observer Research Foundation.
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