The 29th Conference of Parties (COP29) under the United Nations Framework Convention on Climate Change concluded with developed nations pledging $300 billion annually as climate finance for developing countries. However, this amount falls significantly short of the $1.3 trillion demanded by the Global South.
Despite contributing minimally to man-made climate change, the Global South bears the brunt of its impacts. This highlights the need for climate justice, with an emphasis on reparations from the Global North.
Yet, numerous COP meetings have resulted in grand promises but limited financial support, leaving developing nations in a precarious position.
Relying on the Global North has proven insufficient to address the financial gap. So, how should the Global South respond to this challenge?
To bridge the shortfall in climate finance, developing countries must devise independent strategies.
Drawing inspiration from successful global initiatives, they can explore market-based solutions to secure sustainable funding for decarbonization efforts.
One promising approach is the creation of a ‘Green Bank.’ Such institutions are dedicated to financing projects that promote climate adaptation and mitigation. Around the world, green banks are playing a pivotal role in advancing the transition to a sustainable future.
India, for instance, could learn from these examples and establish its own green bank to support its climate goals.
Notable Green Banks Worldwide
Green banks are specialized financial organizations that aim to drive the transition to a sustainable economy by financing clean energy and eco-friendly projects. Here are some prominent green banks and sustainable financial institutions globally:
- Clean Energy Finance Corporation (CEFC) – Australia: Founded in 2012, the CEFC has played a crucial role in funding renewable energy and energy efficiency initiatives throughout Australia. Recently, it earmarked more than one-third of its $1 billion Household Energy Upgrades Fund to support energy-efficient home improvements. This effort includes offering discounted loans in partnership with financial institutions.
- Connecticut Green Bank – United States: As the first green bank at the state level in the U.S., the Connecticut Green Bank has successfully attracted private investments to advance clean energy within the state. Its success has inspired the establishment of similar institutions across the country.
- UK Green Investment Bank (now Green Investment Group) – United Kingdom: Launched in 2012 and later privatized, the UK Green Investment Bank has been a major contributor to funding renewable energy projects across the United Kingdom.
- European Investment Bank (EIB): Although not solely a green bank, the EIB has shifted significant attention toward climate action and environmental sustainability. It aims to support €1 trillion in climate investments by 2030.
- Global Alliance for Banking on Values (GABV): This independent network comprises over 60 banks, credit unions, and microfinance organizations from 44 countries. All members are dedicated to using finance as a tool to achieve positive environmental, social, and governance (ESG) outcomes.
Need For A Green Bank In India
A comprehensive study by the Council on Energy, Environment and Water (CEEW) and the Natural Resources Defense Council India (NRDC) underscores the importance of establishing a green bank in India.
A report by the Reserve Bank of India (RBI) highlights that India’s annual green financing requirement is projected to be at least 2.5% of its gross domestic product (GDP) until 2030.
To achieve the nation’s net-zero emissions target by 2070, India must reduce the energy intensity of its GDP by approximately 5% every year. Additionally, the share of renewables in the energy mix must increase significantly, reaching 70% by 2070-71 from the current level of 5.5%.
Challenges With Conventional Financing
Commercial banks often provide credit at high interest rates and with short repayment periods, which do not align well with the long-term nature of green projects.
In developing countries like India, where interest rates are typically higher than in developed nations, accessing affordable credit becomes even more challenging. This deters investments in green projects.
The unavailability of affordable domestic credit forces green projects to seek low-cost loans from abroad, resulting in capital flight and limited reinvestment in the local economy.
Benefits of a Green Bank
An India-based green bank could provide a sustainable source of affordable credit, fostering long-term finance for green projects.
This institution could source capital from various avenues, including:
- Government grants
- Environmental cess proceeds
- Contributions from foreign and multilateral financial institutions
- Bonds and other dedicated investment instruments
Lowering Capital Costs
Government policies that offer tax incentives to investors in green bank instruments could further decentralize and expand funding. With unilateral funds that do not require repayment, the green bank’s cost of capital would be significantly lower than that of commercial banks, enabling it to provide cheaper credit for green projects.
Economic and Environmental Impact
Although careful lending practices would be necessary to ensure capital recovery for reinvestment, the benefits of a green bank extend far beyond financial gains. These include:
- Job creation
- Increased investments
- Advancement in green research
- Reduction in greenhouse gas emissions
Grassroots Impact and Carbon Market Growth
If funding is funneled through small finance banks to farmers and MSMEs, it could accelerate the transition to a greener and circular economy at the grassroots level. This approach would bolster India’s carbon market and deliver tangible benefits to communities most vulnerable to the effects of climate change.
The Role Of The Financial Sector In Combating Climate Change
The financial sector, particularly banking institutions, plays a pivotal role in the global fight against climate change.
Guiding Investment Towards Sustainability
As key providers of capital, financial institutions hold the ability to channel investments into sustainable projects and technologies. This redirection is essential for accelerating the shift to a low-carbon economy.
By integrating sustainability principles into their lending portfolios, investment strategies, and risk management practices, banks can drive the adoption of renewable energy, energy-efficient infrastructure, and other eco-friendly initiatives.
This approach not only aids environmental preservation but also fosters economic growth and job creation in the emerging green economy.
Financial Institutions in India’s Climate Response
India’s financial institutions (FIs), as the backbone of the nation’s financial system, have a unique opportunity to address climate challenges. With extensive reach and deep connections to local communities, they can leverage their resources to promote climate-positive initiatives.
Key Strategies For Financial Institutions
- Sustainable Lending Practices: Financial institutions can reshape their lending portfolios to prioritize investments in renewable energy, energy-efficient technologies, and environmentally conscious projects. By aligning credit policies with sustainability goals, they can encourage green investments and guide the economy toward a low-carbon trajectory.
- Green Financing Schemes: Developing innovative financial products and services tailored to support climate-resilient infrastructure, sustainable agriculture, and the circular economy is another avenue. Such green financing schemes can attract private capital and promote the adoption of clean technologies on a broader scale.
- Environmental Risk Assessment: Incorporating climate-related risk assessments into credit evaluations enables financial institutions to identify and mitigate potential climate risks in their loan portfolios. This comprehensive approach strengthens the resilience of financial institutions while safeguarding the long-term interests of both the institutions and their customers.
By embracing these strategies, the financial sector can play a transformative role in addressing climate change, fostering sustainability, and ensuring economic resilience in a green future.