Climate Financing — Hasten the walk!
In my current professional avatar, there are very few things that give more joy than making authentic attempts solving meaningful problems along with high quality people. Recently at FIBAC 2022, I had such an exhilarating moment. The topic of Climate and Green Financing in India. The panel felt like a modern high functioning pod and the audience felt like an engaged, energetic tribe.
Taking foundational strides. Everyone on the panel had made significant strides in climate financing. From setting up board level committees to having processes for evaluating green loans in some sectors to accessing funds clearly marked for green financing. They were also pleased with the quality of climate compliance observed in good credit proposals.
“So far not a single proposal which is credit worthy got rejected on account of poor green standards”
Need to hasten the walk. There was clear consensus that we are not where we need to be on this issue. There is a lot of well meaning discussion and action but the scale, scope and speed of action need a big boost. Some concrete ideas below.
Make current loan book greener. While the general discourse is primarily about financing new green technologies, the panel made a penetrating observation that a much larger short term impact can be created by them nudging and encouraging currently funded projects and businesses to become greener and more climate efficient.
Green needs to be reliably green. Take the risk of brown masquerading as green out of the equation. While underwriting toolset in some segments of Green financing like utility scale renewables, roof-top solar are becoming more mainstream, claims of green in other segments are far from reliable. See exhibit below. Therefore, the panel felt it was critical to very quickly create national standards or framework for measurement and certification across major categories.
Paint the MSMEs green. Green and climate needs to go mainstream. For that we need the MSMEs in India to become aware and energised to turn green. Industry and regulatory bodies as well as corporates and Banks need to launch massive education campaigns along with enabling tools for MSMEs to become more green.
Simple moves at scale. We dont need to only focus on the complex esoteric ideas. The panelists believed that simple ideas can go a long way. One of the panelists suggested that something as simple as urging people, government offices and corporates to replace inefficient equipment with more climate friendly and energy efficient equipment can go a long way. The example of Domestic Efficient Lighting Programme (DELP) launched in 2015 to replace incandescent bulbs with LED lights is a case in point. Another example which received applause from the audience is “plant tree(s) for every brown loan given”.
Comprehensive green capital stack is needed. One of the central issues was that the risk-return trade-offs in all the green use cases has not been well established. As a result while pools of global capital are indeed deep, there is friction when it comes to actually putting the capital to work. This part was extensively discussion. Following were some concrete recommendations.
- We need to create domestic pools of equity (in particular) and also debt capital. For this instruments need to be created for wider participation — e.g. InvIT type structures, tax shields, funds specially categorised as green. We did a quick audience poll and while majority were unwilling to take a significant haircut on their returns expectations from green funds, almost everyone was willing to accept a 20-odd bps lower return if the funds were clearly classified as green.
- Create some type of guarantee structure for supporting green financing. It is often seen that for sectors where the risk is not fully established or tends to be more volatile, governments provide guarantees to back-stop extreme balance sheet deterioration. This is akin to a put option. In India we have seen parallels in ECLGS, SIDBI Credit Guarantee Scheme in recent times to name a few. Same structures can be replicated for Green financing.
- Expand the PSL classification of green loans beyond renewable energy. In 2015, RBI included renewable energy loans under PSL. This led to a significant growth in this asset class. As shown in the chart above, climate financing is a much wider gamut. Once the standards and framework are established, it will be very helpful to include other Green use cases within PSL.
With deep thanks to Mr. Ashwini Kumar Tewari (SBI), Mr. Debadatta Chand (BoB), Mr. Rajiv Anand (Axis Bank), Mr. KVS Manian (KMB), Mr. Raj Balakrishnan (BoA).
PS: Views are basis discussion but interpretations are personal.
