Prioritising climate finance

As India stands on the brink of a transformative era, the vision of a ‘Viksit Bharat’—a developed India—demands not only economic growth but also sustainable development. One of the most pressing challenges that must be addressed to achieve this vision is climate change.

The Union Budget is an example of climate irony. Merely mentioning the long-overdue climate taxonomy is insufficient to demonstrate the necessary commitment to climate action. There is hope that the upcoming five-year vision document for the financial sector will offer comprehensive regulatory intent and operational steps for climate finance.

Climate change is no longer a distant threat; its impacts are being felt globally, with India being particularly vulnerable. Extreme weather events, rising sea levels, and erratic monsoons are already affecting agricultural productivity, water resources, overall economic stability, and human indices. The Reserve Bank of India has identified increasing climate shocks as a significant risk to the Indian economy. The financial burden of adapting to and mitigating these changes is substantial, requiring an estimated 2.5% of India’s GDP annually until 2030.

To tackle these challenges head-on, climate finance must be prioritised. This involves mobilising resources to fund projects that reduce greenhouse gas emissions, promote renewable energy, and enhance resilience to climate impacts. Such investments are crucial for job sustenance, creation, and economic diversification.

India’s ambitious goal of achieving Viksit Bharat, or a developed India, must be aligned with its climate action financing needs, which are estimated to require $10–12 trillion. This substantial investment is essential not only for mitigating and adapting to the impacts of climate change but also for ensuring sustainable economic growth and development. Integrating climate finance into the broader Viksit Bharat agenda is crucial, as it will enable India to build resilient infrastructure, foster innovation in green technologies, and create a robust framework for sustainable development. 

Banks and financial institutions play a pivotal role in mobilising climate finance. They are instrumental in developing innovative financial products, such as green credit, green deposits, green bonds, and climate-focused credit and investment funds, which attract both domestic and international investors. As Indian sectors transition to cleaner energy sources, there will be significant implications for financial institutions’ portfolio exposures and future investment mixes. This shift will necessitate adjustments in how financial portfolios are structured, as investments in traditional high-carbon sectors may diminish while those in sustainable and green technologies increase. 

To navigate this transition effectively, it is crucial for the next five-year vision document of the government to outline a comprehensive strategy that integrates climate transition with financial sector adaptation. A well-defined approach will ensure that financial institutions can manage risks associated with this transition while capitalising on emerging opportunities, thus supporting both economic growth and sustainability goals.

This will require coordinated efforts among financial regulators, institutions, and policymakers to create a cohesive strategy that aligns with global climate targets and promotes sustainable economic development. The Financial Stability and Development Council (FSDC), chaired by the Union Finance Minister, has a crucial role in this coordination. Prioritising climate finance within its agenda will ensure that India’s financial system supports the broader goals of sustainability and resilience.

The vision document for India’s financial services must centre around climate resilience. This focus is crucial because coordinated climate actions by various industries, including the central and state governments, require a clear and unified approach to green financing. 

To achieve this, it’s imperative to get the basics right and gain regulatory acceptance of what constitutes “green.” A unified climate taxonomy despite delays is urgently needed for this purpose. Establishing formal regulatory definitions and acceptance upfront will enable financial markets to adhere to these standards without resorting to greenwashing or superficial compliance.

Moreover, harmonising the definition of climate taxonomy with global standards is essential. Aligning with what global financiers consider green will ensure that Indian entities can tap into international financing pools effectively, gaining the right access and pricing. This consistency will not only enhance global investor confidence but might attract more investment into India’s climate initiatives.

The journey towards a Viksit Bharat is inextricably linked with how effectively India addresses climate change. The time for decisive action is now. Integrating climate considerations into the financial and economic planning will not only protect India’s natural resources but also ensure a better quality of life and resilient future for its citizens. 

(The writer is a policy researcher and corporate advisor)