Transition finance: Paving way to a net zero future

In the present day, the global situation is reaching a critical stage and maintaining the status quo is no longer sufficient. Past experiences have shown us that every business model will eventually encounter a disturbance from a novel and more pertinent aspect. The revolution towards sustainability compels businesses to reconsider and adjust their strategies in accordance with the United Nations' Sustainable Development Goals (SDGs).

According to the World Investment Report 2023 by UNCTAD, developing nations are confronted with a monetary shortfall of $4 trillion every year as they strive to accomplish the SDG objectives by 2030. Out of this total, clean energy transition poses an annual gap of $2.2 trillion for these nations. This is where transition finance comes into play, offering fresh methods of financing the energy transition and contributing to a net zero future.

Transition finance has the potential to facilitate a genuine move towards reducing carbon emissions for industries that produce the most carbon, such as hydrocarbons, mining and minerals, coal-fired power generation, steel, cement, and aviation. These industries are currently vital for the economy. Transition finance also has the ability to allow the private sector to generate sufficient profits. The private sector and institutional investors possess the necessary funds to support a sustainable transition. The World Economic Forum proposes that transitioning to an economy that is positive for nature could yield more than $10 trillion in revenue and create nearly 400 million job opportunities by 2030. Importantly, transition finance can also aid the public sector through a combination of private and public partnership financing.

There is no denying that India has made significant strides in its efforts to promote sustainability and combat climate change and other environmental risks. The country has implemented various initiatives to support this cause, such as the establishment of the National Clean Energy Fund and the issuance of the Reserve Bank of India's first-ever Sovereign Green Bond. Additionally, India has also adopted reporting norms for Business Responsibility and Sustainability Reports (BRSR) and expanded the scope of green financing through SEBI (Securities and Exchange Board of India). The recent introduction of regulations by the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) in 2023 is another step towards a greener future as it sets rules for ESG (Environmental, Social, and Governance) ratings providers (ERPs). All these measures demonstrate India's strong commitment to transitioning towards a more environmentally friendly world.

The move towards a more environmentally friendly economy in India is not without its difficulties when it comes to obtaining funding from private companies. These difficulties arise from a range of obstacles, such as the lack of a clear definition for activities that facilitate this transition, leading to misleading claims of sustainability. Moreover, there is a dearth of information about the environmental impact of investments and their sustainability credentials. Additionally, there are only a few financial tools and strategies available that are specifically geared towards supporting efforts to reduce carbon emissions. Overcoming these challenges is essential if we are to attract private sector funding and successfully shift towards a greener economy in India.

Capital markets play a crucial role in facilitating the transition towards sustainability. In order to achieve India's target of 500GW of renewable energy capacity by 2030, financing this investment through green bonds, sustainability-linked bonds, or thematic bonds can be a viable option. A recent report from Fitch Ratings reveals that the Indian debt market has seen significant growth in the issuance of Green Social, Sustainability, and Sustainability-linked (GSSS) bonds, reaching $20 billion as of January 2023. However, this amount is still insufficient. To establish a robust and credible bond market and foster its growth, it is essential for the government to provide directives to institutional investors (such as mutual funds, insurance companies, and EPFOs), mandating a certain percentage of investment in green bonds or instruments. Furthermore, offering tax incentives would help stimulate demand from individual retail investors.

Amishi Kapadia holds the position of co-managing director and CEO at YES Securities.

Stay updated with all the latest happenings in the business world, market trends, breaking news events and the most recent updates on Live Mint. Don't forget to install The Mint News App for daily market updates.

Last Updated: August 7, 2023, 4:55 PM Indian Standard Time