Green finance includes financial instruments lent with the intention of promoting environmental sustainability, usually at a lower cost compared to other sources of funding.
While there is significant green finance available globally, there is a paucity of such capital in India and hence there is a need for a mechanism for Indian companies to tap into the global capital, the executives said during the discussion, moderated by Dhruba Purkayastha, the India director at the Climate Policy Initiative.
For example, the steel sector. It is considered as a ‘hard-to-abate’ sector given the heavy use of coal in blast furnaces and for generating electricity, said Seshagiri Rao, the joint managing director of . The situation is particularly bad in India.
“The average carbon emissions per tonne of steel (production) globally is 1.85 tonnes. In India, it is 2.5 tonnes,” the steel executive said.
While the industry is gunning for efficiency in energy and material consumption and increasing the use of electricity from renewable sources, these measures alone won’t fix the emissions of the sector, he said. For that, there is “huge” research going on to free the sector from its coal addiction and replace it with hydrogen.
“If not today, in the near future, we’re very confident that hydrogen will become affordable (enough) to replace coking coal,” he said. And this is where there is a need for green financing options to fund this transition, he added.
There are also challenges around what projects get classified as green and thus get access to green finance, he said. For instance, there could be projects that may help reduce emissions but may not be termed as ‘green’. Like an investment in a new blast furnace which may be significantly more efficient than the one it replaces, but isn’t a green project as it will still have significant carbon emission.
The power sector is an even bigger emitter than steel.
By some estimates, power generation causes 30% of all carbon emissions. If the sector moved to sustainable means of power generation, it would also help the transport sector cut its carbon footprint given its increasing reliance on electric mobility, said Praveer Sinha, managing director and chief executive of
. Mobility generates about a fifth of all emissions.
However, the issue with renewable sources of power generation is that they are intermittent. While there is a range of solutions being explored to overcome this challenge, it requires significant investments.
Globally, there is a big trend towards decentralization of power generation with renewable energy, Sinha said. All kinds of consumers – whether commercial, residential or industrial – could generate their own power from sources like solar and wind. They can also sell the excess power back to the grid or to the local community.
“So, just from being a user of energy, they are now a producer and a seller of energy,” he said. This would be of relevance particularly in lesser-served communities and rural areas. This movement will
communities and businesses, he said.
This movement for decentralization of power generation again needs support from innovative financing instruments, Sinha said. “The whole financing arrangement that we have today needs to undergo a huge transformation.”
Today, financing is concentrated on the credit risk of the customer. But that needs to make way for a retail-driven system where lending is based on the borrower’s ability to leverage the energy generated to pay back, he said. Such a transformation in lending would need support from both the government and the whole lending ecosystem.
While the industrialists outlined their requirements and concerns, lenders said there were a lot of challenges at their end too.
“We have to do a lot more to be able to attract finance into India,” said Kaku Nakhate, country head – Bank of America India. “Globally, I think most of the financing has gone into sustainability-linked or ESG-linked bonds. Blended finance has been another such vehicle.”
Sustainability – and ESG-linked financing looks to promote social and governance aspects also along with environmental conservation. Green finance is a subset of these and focuses on environmental aspects, as per a description given by the United Nations Environment Program. Blended finance is a combination of private or public capital and philanthropic or development funds in such a way that the latter assumes more risk in a development project. The ‘blending’ helps increase the pool of funds, as every dollar of the concessional capital attracts multiple orders of private capital, and thus it helps make a larger impact.
In the current year, around 10.5% bonds in emerging markets were ESG-linked, whereas the number was just 0.7% in India, Nakhate said. The share was as high as 25% and 20% in China and South Korea.
Anirban Mukherjee, managing director and partner at
Consulting Group, concurred with Nakhate. Green investments of $200 billion are needed annually to meet India’s net-zero target, he said. Of that, the country is managing just about $20 billion currently. Even there, a large part comes from traditional public and domestic sources.
“So, the need to deepen green finance and tap into international funds is really strong and really immediate,” he said. “Specifically, in terms of the blended finance.”
Nakhate agreed on the need for popularizing the concept of blended finance in India. “Multilateral agencies are willing to put in initial funds for newer kinds of clean technologies which probably have not seen the light of the day,” she said. “And that’s when banks can come in with slightly costlier capital and the blended finance will be much cheaper, which will make the projects viable.”
There have been instances of using blended finance in India before, according to Mukherjee, but that was often to tackle a singular problem of taking a proven technology to newer markets or scaling a proven technology. However, in the case of green finance, the problems are multifaceted – right from the technology being unproven to markets being new and a lack of scale.
For this, there is significant concession capital available globally that makes decisions based on the cost of inaction, he said.
“There is a need to then structure together and use creativity to bring in the capital which is available. But the structures need to be built and the regulators and the banks have to come together to do that,” he said.
Beyond blended finance, regulators may also look into opening up the Indian bond market to make it easier for Indian companies to tap into global capital, Nakhate said. “To attract capital, we need to open up bond markets and get them included in indices.”
Further, Indian regulators could also think about bringing in the concept of ‘green bank’, she said. A green bank specializes in using innovative financial tools in partnership with the private sector to fund the kind of green and transformational projects that Rao and Sinha mentioned above.
“Countries like Japan, Australia, Malaysia, Switzerland, the UK, all have green banks,” the Bank of America executive said. “We always talk about the bad bank. But we could change the nomenclature to green banks.”
The Reserve Bank of India has taken cognizance of the industry’s requirements and published a discussion paper on climate risk and sustainable finance on its website last month, RBI chief general manager Sunil Nair said.
The central bank has also published a survey of Indian and foreign banks on what they think about sustainable finance.
“This, coupled with the discussion paper, will set the tone going forward as to how climate risk and sustainable finance can be taken forward,” Nair said.
RBI has also been permitting banks to lend for renewable energy generation through priority sector lending, he said.
“But it doesn’t stop there. A lot more work needs to be done and the Reserve Bank is conscious of that. The amount of finance required for climate risk and sustainable finance is huge,” the RBI executive said. “So, we want the stakeholders to respond to the discussion paper. Post that we will come with a roadmap as to how we should go forward.”
Green banking has percolated down not only into bonds or loans, but it is also going into areas like supply chain financing and cash management, said PD Singh, managing director and head of corporate banking at JP Morgan India. However, unless there is a financial incentive, cleaner technologies will not be adopted very quickly, he said.
Sharing an anecdote, Singh said JP Morgan had engaged with Bridgestone for supply-chain financing. Suppliers of the tire maker would get better pricing if they have a superior ESG-rating. This gives the suppliers and the entire ecosystem an incentive to be more transparent and move towards higher sustainability.
“What is important is that all of this is replicable, and all of this is in the public domain for other corporates to step in and take action on,” Singh said.