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As India recovers from impact of the coronavirus pandemic, it also faces a threat from climate change, which could derail long-term recovery efforts. Climate Policy Initiative provides a roadmap for a comprehensive green finance strategy in India to help ensure a sustainable recovery.

Economic growth in India faces a dual threat. As India recovers slowly from the impact of the coronavirus pandemic, it also faces a threat from climate change, which could derail long-term recovery efforts. Though carbon emissions have decreased significantly due to the lockdown of the economy, the flip side could be that political will, and institutional efforts directed towards climate mitigation and adaptation, could become secondary as quick economic recovery takes centre stage.

This would be a disaster. India is one of the most climate-vulnerable countries, and economically weaker sections of the country would be impacted disproportionately by climate change. India is ranked the fifth most vulnerable nation to the effects of climate change, with 2.5-4.5% of its GDP at risk annually. Any deviation from India’s sustainable development plans, including the target of reducing the carbon intensity of its economy by 33-35% by 2030, could expose the country to this serious threat and derailing all economic recovery efforts.

In the short term, COVID is expected to reduce India’s GDP growth by 6% for 2020 and climate change could dampen it further by 3% annually.

Addressing climate change even without COVID-19 requires massive investments of the order of $160 billion annually; coping from COVID-19 impact would increase the required investments significantly

India needs to mobilize a total of $2.5 trillion over 2016-2030 to achieve its goal of decarbonizing the economy and adapting to climate change effects. Financing for decarbonizing the economy faces various challenges: some are specific to the green sectors, while others are more generic. The unique barriers are lack of clarity in defining green economic activities (green finance), failure to internalize environmental externalities, in financing costs, information asymmetry and limited historical information for assessing climate risks. The generic barriers are early-stage technologies, untested business models, long-term nature of green projects and lack of climate risk-adjusted financial instruments.

So how can India mobilize green investments at such a scale? India needs to develop a green finance strategy. A recent study by Climate Policy Initiative provides a roadmap for a comprehensive green finance strategy in India comprised of the following components:

  • A common and accepted taxonomy of green finance
  • Recognition and disclosure of climate change risk (preferably quantified) in the financial system
  • Redefining current policies and regulations to incentivize green finance and penalize carbon-intensive investments

However, the key initial barrier is the absence of a clear definition of green finance, which leads to lack of measurement and tracking of green finance investment in India. While there are a number of international initiatives that focus on aligning definitions, disclosure and reporting practices, India’s financial sector is not fully aligned with any organized efforts to accelerate green lending and investment.

A formal definition of green finance in India would enable more precise tracking of finance flows to green sectors, which in turn, would help design effective policy, regulations and institutional mechanisms directed towards increasing both public and private investments in green sectors.

A formal definition would also accelerate the development of green financial products and services for investors and depositors, enable financial intermediaries to assess their climate change risks and opportunities, and improve reporting and disclosure practices.

By looking at other initiatives and India’s unique needs, we show that India’s green finance definition could be formed through a combination of adopting international practices, developing a set of principles for green economic activities, and obtaining stakeholder views. Our analysis finds that a combination of these approaches may be the best fit for India, with a finance sector taxonomy foundational to driving green economic activity.

Sensitizing India’s financial sector to the importance and benefits of green finance can happen through sustained, market-led collaborative actions that accelerate green capital flows, beginning with an agreed definition. This is a concrete action that Indian policymakers and leading investors can take now, even in the time of coronavirus and lockdowns to ensure a sustained, and sustainable recovery.

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