CashNews.co
Furthermore, with its updated Nationally Determined Contribution (NDC), aims to achieve 50% of its cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030, contingent on assistance through technology transfer and low-cost finance (August 2022 Submission to UNFCCC). India’s NDC firmly commits to mobilising domestic and international financing to implement climate mitigation and adaptation measures.
It is to be noted that such a large investment cannot be borne solely by the public exchequer, hence, there is a need to tap private markets.
Policy and Regulatory Levers
Climate change and climate financing are new frontiers to policymakers and financing institutions, demanding regulatory flexibility to foster financial product innovation. This adaptability must be balanced with the resilience of the financial system and robust consumer protection to ensure sustainable progress.
Till now, the domestic finance has played a crucial role for India’s climate action. A 2022 report by the Climate Policy Initiative found that domestic sources accounted for the majority of green finance in India, at 87% and 83% in fiscal years 2019 and 2020, respectively. While international sources are increasing (from 13% in FY 2019 to 17% in FY 2020), the financed amounts are much lower as base effect, and they are still insufficient to meet India’s net-zero target. Therefore, greater participation from international finance is essential.
To attract such international finance towards climate mitigation and adaptation, policy and regulatory levers will need to be implemented. Each financial regulator in India—RBI, IRDAI, IFSCA, and SEBI—can play a pivotal role in promoting climate financing by encouraging regulated entities to adopt adequate risk mitigation frameworks. This approach can help tap into both domestic capital and international funding, providing the necessary financial support for green projects.
Climate Risk Insurance
The Indian insurance sector must urgently rise to the challenge of climate risk insurance to protect against increasingly frequent and severe extreme weather events. This type of insurance can significantly mitigate the effects of climate change for a wide range of stakeholders, including community groups, households, individuals, regional entities, governments, and corporations.
There is an urgent need to develop a framework for creating metrics and assessing climate change risks. Accurate datasets are needed to offer specialised climate insurance products that can mitigate financial and other risks associated with climate change, particularly extreme weather events, at affordable premiums. For the insurance sector, this is not just a challenge but a substantial business opportunity, offering the potential to tap into a growing market while contributing to the nation’s resilience against climate impacts.
GIFT-IFSC is also uniquely positioned to play a key role. It can act as a channel for foreign capital to meet India’s net-zero goals, and the regulatory framework for IFSC can be developed to attract both grant, as well as concessional capital which can help in offering innovative blended finance instruments.
Private Capital
These instruments can facilitate crowding in of private capital (estimate to be in the ratio of 1:3 to 1:8 leverage, meaning each rupee deployed through such mechanism can crowd in 3 to 8 rupees) which would otherwise not be deployed due to high perceived risk in new technologies and interventions in the climate space. The recent report on Transition Finance by Expert Committee on Climate Finance in IFSC addresses some of these aspects and covers how international investors can be attracted while also considering India’s socio-economic realities.
The Union Budget 2024 mentioned that the government would roll out a climate taxonomy tailored to Indian objectives. While this is a promising step, it appears less urgent from a climate financing perspective. More comprehensive actions are needed to make affordable climate finance available.
While the taxonomy could serve as a catalyst, it alone cannot address the entire financing journey. The taxonomy must be standardised across all financial and sectoral regulators in India and be acceptable to global financiers of Indian entities seeking financing for climate action. Nevertheless, this objective is crucial for shaping new laws, regulations, and policies that can encourage climate financing in India.
Innovation in Debt and Equity Instruments
To increase mobilisation of funds through financial instruments, innovation in debt and equity instruments will need to be coupled with nurturing of risk mitigation tools like insurance and guarantees. The first step to attract the capital would be to reduce certain systemic risks with the help of have a clearly defined policy and clarity in the current regulatory and tax framework. Further, illustratively key instruments such as blended finance funds, carbon credits, and climate insurance which can unlock additional pools of capital for climate finance must be actively promoted.
Similarly, the Government of India’s recent announcement to introduce a Carbon Credit Trading Scheme by 2026 is a positive development, incorporating both a voluntary trading system and a compliance-based element. However, important aspects such as the taxability, classification, and applicable tax rates for carbon credits remain unclear. These uncertainties could impact the attractiveness and viability of the scheme for investors.
Another area where regulatory changes could significantly support blended finance is the current restriction on pooling grants and CSR funds into alternative investment funds (AIFs). Currently, this pooling is not feasible without FCRA approvals, which are typically not granted to private entities such as funds. There is also concern that the Ministry of Corporate Affairs (MCA) will scrutinise the contribution of CSR funds to an AIF, questioning whether the objective is to create social impact or to generate profits for investors.
Charities and CSR
Additionally, charities and CSR entities face the risk of having their contributions disallowed for tax purposes, leading to high tax liabilities and potential revocation of their tax-exempt status. These issues can be resolved through detailed, structured reporting.
Raising climate funds presents a significant challenge without the support of grants, concessional capital, or blended finance mechanisms. SEBI’s restrictions on priority distribution models, intended to prevent loan ever-greening, have made it difficult to structure blended finance funds in India, especially those using junior equity models.
Junior equity or first-loss capital is crucial for mitigating risk for commercial investors, as impact investors accept subordinate returns. For instance, the Global Climate Fund, established under the UN Framework Convention on Climate Change to aid developing countries in climate adaptation and mitigation, allocated USD 200 million in first-loss capital to the India E-Mobility Financing Program and the Green Growth Equity Fund, blending this capital at a Singapore feeder level in both cases.
This approach has been successfully implemented in several international jurisdictions, including Singapore, the UK, the US, Japan, and Germany, where fund managers utilise differentiated distribution models.
These are only the beginning of a long climate action journey. Just as apps need regular upgrades to stay current, climate financing regulations must evolve swiftly to reflect the dynamic global actions and their cascading effects. Agile regulatory updates will mirror the ever-changing landscape of climate action, ensuring effective and responsive financial solutions.
—The authors; Dr. Srinath Sridharan (@ssmumbai), is a Policy Researcher & Corporate advisor, and Meyyappan Nagappan (@meyya3), is a Partner at Trilegal Law.