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Greening NBFID: How India’s new institution for development finance can help meet its sustainable funding needs

NBFID aims to help counter investors’ aversion to lending to risky green projects, and ensure the availability of resources at a relatively lower cost of capital

At COP26 this year, India presented five nectar elements to deal with the challenge of climate change. According to these Panchamrit principles, by 2030, India aims to increase its non-fossil fuel-based energy capacity to 500 GW, meet 50% of its energy requirements using renewable energy, and reduce the economy’s carbon intensity to less than 45%. Between now and 2030, the country has set a target to reduce its projected carbon emissions by one billion tonnes. Lastly, it has committed to becoming carbon neutral and achieving net-zero emissions by the year 2070. 

What is interesting is that these announcements come in the same year the National Bank for Financing Infrastructure and Development (NBFID) Act, 2021, established a development financial institution (DFI) that offers long-term non-recourse financing for the various segments of the economy where risks are too high for commercial investors. Could this provide the leverage India needs to meet its sustainable funding needs?

What does India need to achieve its climate goals?

The country needs to invest a massive amount of capital in climate change mitigation projects, including renewable energy, energy efficiency, clean transportation, etc., in the next five decades to meet its global commitments. Besides, India also needs to invest heavily in climate adaptation as the impact of climate change risk is imminent. In comparison to climate mitigation, climate adaptation gets less attention as its benefits are restricted to a particular region.  

It is noteworthy here that India is one of the most climate-vulnerable countries in the world. It is ranked 7th in Germanwatch’s Global Climate Risk Index. Rising daily temperatures are leading to frequent extreme weather events. The National Disaster Management Authority estimates that 58.6% of the landmass is vulnerable to moderate to very highly intensive earthquakes; 12% of the land is prone to flood and river erosion. Out of the 7,516km coastline, 5,700km is exposed to cyclones and tsunamis; 68% of the cultivable land is at risk of drought, and 15% of the landmass is vulnerable to landslides and avalanches. In 2018 alone, India’s economic loss due to climate change was estimated at $37 billion (about 0.36% of its GDP), impacting multiple sectors like housing, infrastructure, construction, etc. Clearly, the country needs to invest significantly in climate adaptation projects, including building sea walls, strengthening disaster early warning systems, and developing drought and flood management infrastructure. In this pursuit, long-term and low-cost capital is a critical enabler of India’s climate action. 

Although there is no precise estimate on capital requirements to achieve climate goals, there is a consensus among forecasters that India needs trillions of dollars of capital to meet its climate goals. In the renewable energy sector alone, India needs more than $500 billion to reach its target of 500 GW by 2030. There are trillions of dollars required to decarbonise its electricity system and hard-to-decarbonise industries, transportation, agriculture, and climate adaptation projects over the next 50 years. Most of the financing requirements are long term and are associated with high real and/or perceived risk.

How can NBFID clear the way for sustainable green finance?

Presently, the lack of a climate/green finance taxonomy, poor incentives for borrowers to invest in green projects, unproven business models, long-term financing needs, limited information, and bankability validation constraints private financers from funding projects related to climate change. There is a need to align India’s financial sector with organised efforts to accelerate green lending and investment. The NBFID can play an important role in countering markets and financial institutions’ aversion to lending to risky projects and ensuring the availability of resources at a relatively lower cost of capital. Attracting large-scale public capital can play a catalytic role in addressing what is arguably the country’s biggest growth and developmental challenge. 

Several businesses and projects pertaining to climate actions have the same characteristics as infrastructure projects. Some of them are—natural monopoly, high-sunk costs, non-tradability of output, and bestowing of externalities on society. Some of these projects belong to the infrastructure sector, such as utility-scale renewable energy projects, green-energy corridor, battery charging infrastructure, climate-resilient infrastructure for drought and flood management, and sustainable mass rapid transportation systems. Without public financial support, it isn’t easy to scale and sustain these projects. 

The NBFID has been mandated to lend, invest, and offer financial solutions which can attract private capital for infrastructure projects. It can bridge the gap in long-term financing of projects for India’s climate actions by contributing both direct financing and also providing a supportive, collaborative environment to catalyze private finance for those counterparties that would otherwise struggle to attract investment. It can offer a range of financial products to pump the economic credit engine and support companies and projects that might otherwise be considered too risky—typically due to the project’s length, type, or geography.  NBFID will achieve two goals—meeting policy objectives to overcome market failures in projects and meet sustainable development needs.

India is leading two international institutional initiatives to encourage environment-friendly investments and divert capital from carbon-emitting sectors to carbon-mitigating sectors, namely the International Solar Alliance (ISA) and the Coalition for Disaster Resilient Infrastructure (CDRI). The former has a target to mobilise investments of more than $1 trillion by 2030, and the latter aims to promote the resilience of new and existing infrastructure systems to climate and disaster risks. The NBFID can be positioned as a green financial institution to play a catalytic role in supporting these two global initiatives—lend or invest or design financial solutions to attract capital. 

Lack of information for decision-making and high transaction costs associated with modeling climate risk scenarios often impede investments in adaptation projects. The NBFID can mainstream adaptation in lending operations by prioritising disbursement of funds to borrowers that display a commitment to international frameworks on climate change. Furthermore, as sustainability and climate change are growing as a thematic investment class among investors, the NBFID can design innovative financial instruments to source funds from capital markets, government, and multilateral institutions. These instruments can include long-tenor loans, green/climate-resilient bonds, credit-enhancement mechanisms, credit guarantees, etc. Besides, it can conduct due diligence of green projects on behalf of other government and multilateral institutions that do not have the capacity and know-how to appraise these projects.

Today, the government is looking at the NBFID as “necessary to act as a provider, enabler, and catalyst for infrastructure financing.” Like infrastructure, a cog to economic growth and development, climate change projects aim to make the economy resilient and allow it to maintain healthy growth. Besides, they hold similar characteristics of infrastructure projects, hence warrant urgent attention. NBFID can be the right institution to help India’s transition to a sustainable economy and demonstrate its commitment to climate action.

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