Financing the Green Transition: Addressing Challenges and Advancing Climate-Based Infrastructure

Financing the Green Transition: Addressing Challenges and Advancing Climate-Based Infrastructure

The National Bank for Financing Infrastructure and Development (NaBFID) has recently outlined its plans to introduce takeout financing products, invest in Infrastructure Investment Trusts (InvITs), and refinance loans. While these initiatives are commendable, it is crucial to approach them with caution. This article explores the concepts of takeout financing, InvITs, and refinancing loans, and highlights the challenges associated with integrating climate risk into the National Infrastructure Pipeline (NIP). Additionally, it discusses global efforts towards climate-based infrastructure financing and steps taken by India to promote sustainable infrastructure. Finally, it presents recommendations for NaBFID to effectively address these challenges and facilitate the green transition.

 

Challenges in Integrating Climate Risk into NIP:

1. Limited focus on chronic physical risks: The integration of climate risk in NIP primarily revolves around acute physical risks, such as disasters and extreme events, while neglecting chronic physical risks like rising temperatures and biodiversity loss.

2. Insufficient emphasis on green and blue infrastructure: NIP's focus remains primarily on traditional grey infrastructure, disregarding the global trend of embracing nature-based solutions and green and blue infrastructure. This lack of integration hampers the adoption of measures like green roofs for flood mitigation.

 

Global Efforts for Climate-Based Infrastructure Financing:

Under the task force on climate-related financial disclosures, the G7 has supported the mandate for disclosing climate-related risks for banks and companies. However, in India, these disclosures largely remain voluntary.

 

Steps Taken by India to Promote Climate-Based Infrastructure:

India has introduced Business Responsibility and Sustainability Reporting (BRSR) based on the principles of National Guidelines for Responsible Business Conduct (NGRBC) by SEBI. This reporting requires companies to address sustainability challenges, ESG targets, and assess risks and opportunities. Additionally, frameworks for green/blue bonds, green deposits, and climate stress testing guidelines have been proposed.

 

Challenges in Implementing Climate-Based Infrastructure Finance Mechanisms:

1. Time-consuming and lack of expertise: Operationalizing concepts like BRSR and mainstreaming their implementation is a time-consuming effort that requires specialized expertise, making the task complex and challenging.

2. Financial risks: Climate change poses significant financial risks, as exemplified by insurance companies exiting areas prone to wildfires. Identifying and quantifying climate risks while accounting for credit risks is a complex process.

 

Effective Measures for NaBFID:

1. Focus on structural measures: NaBFID should prioritize structural measures that enhance asset provisioning, improve asset quality, and generate returns on investment to address climate-related financial and infrastructure challenges.

2. Enable PPP projects' success: NaBFID should consider recommendations for investing in pre-planning, site investigation, and adopting a collaborative planning process to ensure the success of public-private partnerships (PPPs).

3. Proper assessment of credit demand: NaBFID's plans for takeout financing should be accompanied by a thorough assessment of broad-based credit demand and growth prospects.

4. Utilize innovative financial products: NaBFID should leverage innovative financial products like green bonds, sustainability-linked bonds, and transition bonds to redirect financial flows towards climate mitigation and resilience projects. Private placements by NaBFID can increase green capital flows to infrastructure.

5. Implement safeguards: Employ entity-level and project-level safeguards to direct funds towards appropriate projects, attracting diverse investors and enabling the scaling of finance.

6. Adopt disclosure standards: Following frameworks like the Task Force on Climate-Related Financial Disclosures by G7 would enhance transparency, credibility, and prevent potential greenwashing.

 

To build climate resilience and integrate nature into decision-making, it is essential to adopt emerging standards for infrastructure projects, considering their impact on biodiversity and natural infrastructure. Mobilizing the necessary funds and reinforcing government policies to meet net-zero commitments can be achieved by effectively addressing challenges and advancing climate-based infrastructure initiatives.

Thank You