With India’s commitment to Net Zero by 2070, policy pathways for “bending the curve” are now taking shape. India emits around 3.5 giga tonnes (billion tonnes) of CO2 equivalent in a year. For India to reach emission levels of zero, it will require the annual emission curve, which has risen along with India’s GDP (though not proportionally), to eventually be on a path of decline every year. Sometime soon, the curve must peak and then start its journey downward. The trajectory of the policy pathways will create large investment opportunities.

Also Read: Carbon Neutrality by 2070: Banks must factor in climate risks

Countries now recognise that the development path forward lies in aligning with this climate mandate. India needs to invest trillions of dollars in meeting its Net Zero commitment—estimates by CEEW run to over $10 trillion in the next half century. IEA estimates the investment to be in hundreds of billions of dollars in this decade till 2030. The sums of money to be channelised for this transition is very significant as a proportion of India’s current and projected GDP.

For the alignment of development with climate goals to happen, countries in developing world require seamless flows of finance, technology, and capacities to develop the ecosystem. A progressive set of regulations can help bring these three elements together. Regulators can bring together appropriate products for different types of capital;  create facilitating regulations and policies; and work actively towards building capacity.

Regulatory support for new products and markets

Climate finance, and its three components of adaptation, mitigation, and resilience, is a subset of sustainable finance. Given the intense focus of countries on Net Zero, climate finance has emerged as the key segment of sustainable finance. Indeed, the discussion on funds flow of $100 billion annually from the global north to global south is based on climate considerations. In this article, climate finance related requirements are referred to.

Creating a market for any product requires having reasonable numbers of buyers (investors), sellers (issuers), and liquidity (traders). A few product ideas and the regulatory support such ideas need in building a vibrant market are discussed ahead.

Also Read: A carbon market for India

Over the last few years, sustainable bonds issuance has increased globally and in India. They seek to cover a wide range of final use cases: from using the proceeds for ‘green’ projects to investing in transition processes. Corporate sector has been first off-the-block in raising such capital—governments around the world are also  increasinglyseeking to raise ‘green’ bonds. In all cases, the understanding or taxonomy of ‘green’ needs to be clearly articulated. The confusion on what is green can eventually lead to concerns on ‘greenwashing’.

Since many of the technologies and products that will come through in the green transition will be new, they will also be risky. Many things can change (regulations, technologies, consumer acceptance, newer products, etc) and they can impact the viability of the projects and businesses focusing on green transition. At the portfolio level as well as for individual investments, it is important to create risk mitigation products which can help share risks across different participants (who may be better suited to take on risks) or offer credit guarantee (against the inability of the business being able to repay their loans). Funds can pool in different types of capital (like impact capital, first-loss funds, low-return expectation funds, guarantee funds, etc) which can offer appropriate capital solutions to unique situations. The ability to create such structures or to pool such funds require facilitative regulations.

One important new market that is expected to open is the carbon market. A discussion paper on voluntary carbon markets is already in the public domain. Over time, different policies may impact the creation and development of carbon markets: for example, cap-and-trade across sectors, carbon trading regulations (both within the country and outside), taxes on carbon or incentives on non-carbon, etc. Like the development of other markets (for example, power trading), development of the carbon market will require careful planning. Given the global nature of carbon, having exchanges which can link the local carbon trading with international markets might be useful.

Over time, as the green economy stabilises and matures, debt products and investment trusts can help in take-out financing. These need for these products will evolve naturally and gradually.

Capacity building

Two types of capacities are required to be built: (a) by the industry, and (b) by the regulator.

How to measure their environment footprint and report it accurately requires significant capacity enhancement for the industry. While the current regulatory dispositions are largely around voluntary disclosures, over time such disclosures could become mandatory, and then eventually be driven by targets for various industries. Like the code for deciding what is ‘true and fair’ in the world of financial statements has developed,  standards and professionals are needed for disclosures for climate reporting.

Regulators will need to create sandboxes for companies, investors, fund managers to try out newer structures and products. Flexibility in matching the appropriate risks and returns to different pools of qualified capital can help unlock larger financing.

Role of IFSC

Globally, many large funds and fund houses now have ESG mandates which require them to focus specifically on certain issues like environment and sustainability. Such mandates may come out of regulatory requirements or from the ability of the funds to cater to the underlying need of their investors. Bloomberg estimates that global ESG assets may hit $53 trillion by 2025. Since these funds are raised globally, they are typically denominated in hard currencies.

India’s International Financial Services Centre (IFSC) is well suited to become a jurisdiction for pooling of such capital for financing India’s green transition. A recent expert committee report for IFSC on sustainable finance offers some interesting recommendations for such a green journey.

(The author is with National Investment and Infrastructure Funds Limited. Views are personal.)