By Shailesh Haribhakti and Suyash Agrawal
A lapel adorned by Dr Mahmoud Mohieldin, an economist and Executive Director at the International Monetary Fund, managed to gather the attention of the world’s climate pundits at COP27, which was held at Sharm El-Sheikh. The lapel read just 3 letters, “WTF”. In addition to its widely known full-form, Dr. Mohieldin humorously elaborates to “Where’s The Finance” when questioned. Though 3 words, they drive home the true essence of all COPs and every climate debate.
What can we do that is not already done? How do we better ourselves this time? Do we not owe it to our planet and its people? Who funds this transition?
The time has come for us to deliver on the promises that we made at all the previous COPs. Our planet is yearning to heal. While we have demonstrated ambition, the time is now for implementation. For the climate clock ticks, every action will count as we race to stop the 1.5-degree breach.
Extreme climate events of the past year evidence the urgency for climate funding, not only for mitigation but also adaptation and loss and damage.
Making net zero fund-able
India has been at the forefront of global climate action and is one of the only G20 nations on track to achieve its Paris Agreement commitments. We must strive to continue on this path of glory. Targeted policy action across corporates, financiers, and governments is making the net zero transition fundable and feasible.
The United Nation’s Sustainable Development Goals (SDGs), Paris Climate Agreements, and commitments at recent COPs have set the global tone. Flowing out of the Paris Agreements, India launched “long-term low carbon emission development strategy” (LT-LEDS) at COP27. Giving an account of current policies, this document forms the fountainhead of all low-carbon development in India. It sets the much-awaited tone of climate intent and direction. For our planet and its people, we urge you to take note.
Now, what is the finance world doing to push forward?
The Glasgow Financial Alliance for Net Zero (GFANZ) was launched at COP26, and now represents over $130 trillion in assets and 450 members. Formed with the aim of transitioning financials, it addresses sector-wide challenges and ensures ambition and action move simultaneously. For India, the SEBI, RBI and IRDA should consider drawing from the work of GFANZ and India’s LT-LEDS to craft sectoral transition plans with set timelines and milestones. As an outcome, fundable technologies of the future will emerge.
Fuse net zero transition and ESG
We suggest you think of ESG in terms of inputs and outputs. ESG considerations as an input in all decision-making processes. As output in clear ESG reporting and stakeholder communication. All actions towards Environmental Stewardship (E), Social Responsibility (S), and Corporate Governance (G) have better output. A net zero transition is about ecosystems, which include the environment, communities, and everything in between.
Financials that includes banks, insurance companies and asset managers, as a part of their Scope 3 disclosures measure and report financed emissions. This positively positions them to push for corporate transitions and enhancing ESG goals. Partaking in alliances such as GFANZ and PCAF (Partnership for Carbon Accounting Financials), has the potential to help the Indian financial sector establish credibility globally while enabling smoother access to international finance.
Moving the needle
Regulation and finance fuels the virtuous cycle of cost democratization, mass adoption, savings, and ultimately capital formation. A phased policy push across banking, securities markets, and ESG is accelerating transition. The United States and Europe have moved forward with their taxonomies and regulations. While India draws the best from the world, its plan address our unique set of climate issues.
SEBI’s supremely comprehensive BRSR (Business Responsibility and Sustainability Reporting), when integrated with data-led reporting of corporate transition plans will unlock unwavering credibility.
Much like the financial accounting world, global ESG accounting standards should be harmonized and adopted for use in India. Climate risk assessment and transition guidelines by the RBI and IRDA will help their regulated entities to assist their partners toward a smooth climate transition.
The future of our planet and generations to come lie in jeopardy. Our time to act is now.
As banks, insurers, and asset managers assist their partners in drawing transition plans, the industrial landscape of the next 30 years will become clearer. Fundable opportunities of the future are coming to fore. As reported by the World Economic Forum, India needs an investment of USD 10.1 Trillion beginning now, to achieve its 2070 target.
Frequent climate events necessitate financing towards adaptation and loss and damage in addition to mitigation. A net zero transition is not just emissions, but establishing secure supply chains for cleaner food, water, energy, and circularity at democratized costs. For India, it is our duty to achieve “atmanirbharta” while remaining sustainable. Innovative finance products fuelled by policy interventions to lead the way, some of which are as follows:
• The priority sector lending norms could be revisited to expand its classification and funding limits to enable a net zero transition
• To preserve the interests and hard-earned savings of its depositors, the financials sector should consider a comprehensive climate risk assessment and measures to track and report financed emissions
• To accommodate the evolving landscape of net zero projects, the framework on External Commercial Borrowings (ECB) could be looked at
• Realignment of debt schedules through “debt swaps for climate financing” could be experimented with, where service payments are utilised for climate funding gaps
• A one-of-a-kind pathbreaking insurance fund to house all hedging costs of external green finance
• Incorporate a robust secondary market for green debt to infuse liquidity and create a pool of sustainable debt enabling entry and exit at ease
• Lay down taxonomies for green debt and investment instruments in-line with upcoming global regulations
In a world of hyper-inflation and fluctuating interest rates, the opportunity of an interest rate arbitrage on green debt is ephemeral. The quest to clock in interest gains by going green should be systematically harmonized. To deliver on the promise of net zero, climate/green finance must get mainstreamed. All credit ratings will account for ESG and climate-related parameters.
In the coming few years, all financing, whether equity or debt will include covenants on driving sustainability and a better climate. Lack of green considerations will be penalised through higher coupons. The “green” from “green finance” will be dropped. All finance will become green while all green finance will just be “finance”.
The authors – Shailesh Haribhakti is independent board member at L&T Finance Holdings and Suyash Agrawal is managing director at You Commit, We Implement (YCWI). Views are personal.