Energetica India Magazine May-June 2021

FINANCE Climate Financing in India: Challenges and Opportunities 46 energetica INDIA- May-June_2021 Animesh Damani Managing Partner, Artha Energy Resources Recently two major partnerships have been seen between India and two lead- ers of western economy, the US and UK. These partnerships were in the news due to their focus being the ongoing cri- sis of climate change, and financing in the sector. However, there is more to the subject than what meets the eye. Climate financing in the simplest terms is the investment that is made towards reducing emissions and protection of the environment. It is a subset of the more encompassing ‘Green Finance’, which is geared towards promotion of sustainable development. India is cur- rently facing a shortage in both. As per the Climate Policy Initiative (CPI), India will require approximately Rs 11 Lakh crore or USD 170 Billion per year for climate action and to achieve its 2030 targets! Currently India is investing $8- 10 Billion per year in Renewable Energy since 2018! There are many restrictions in India that makes climate financing a less than lu - crative option for investors. In addition, there is a perception that climate fi - nancing, and climate change, function in silos to economic development and has no impact on it. This perception has further dampened the progress that we could have seen in the sector. Adding to it are the internal factors like weak finan - cials of DISCOMs, constant re-tendering of projects, flip flop in policies, federal structure of electricity and now the slow- down due to the pandemic and lock- down has not helped either. Let us look at the data pertaining to Green financing in India which highlights these challenges. The research pub- lished by CPI in September 2020 brings some interesting points to the forefront. Foreign Direct Investment accounts for around 5% of the total investments, which is one of the lowest, only tied with investments by corporates. Overall, only 15% of the total investments were inter- national in origin. A significant portion of the burden of carbon emissions and other environmental degradation is to be borne by developing countries but only 25% of the funds raised by developed countries are being invested in devel- oping countries. Most of India’s green finance comes from commercial banks in India, and for us to realise our climate goals, we need far more foreign invest- ment and participation from domestic investors. At this stage, how about we take one step back and look at the economic im- plications and the impact on economic growth that climate change will have, putting an urgency to climate financing. Global consultancy firm McKinsey in its report looking at the correlation between climate change and economic develop- ment, shared that by 2030, India would be putting between 2.5% and 4.5% of its GDP at risk due to the lost average daylight hours. It is very evident that the downside of under investing in the fight against climate change hurts In - dia’s future economic development. As an industry, renewable energy has been leading the green initiative in India from the forefront. However, the industry is vastly underappreciated and requires financing to grow by 17 times from the current levels. The key question is how can we quickly mobilize the resources required to meet our future financing needs? The current focus of financing in the In - dian renewable energy sector is lending through commercial banks, which may not be best suited for this role as they have little expertise in renewable energy. Moreover, many of them have been sad- dled with legacy lending to the thermal sector with many NPAs. Hence, there is inherent reluctance to lend to the sector. There is a great need for specialized institutions, such as IREDA, that focus exclusively on financing renewable en - ergy projects. IREDA’s loan book of $3.5 Billion USD is too small to meet the fi - nancing needs of the sector and there is There is a great need for specialized institutions, such as IREDA, that focus exclusively on financing renewable en - ergy projects. IREDA’s loan book of $3.5 Billion USD is too small to meet the financing needs of the sector and there is a great need for increasing the number and size of such institutions.