Opinion Financing the green transition

Funding for infrastructure development must account for climate-related stress

Indian Infrastructure, Green infrastructure, India infrastructure needs, traditional grey infrastructure, stormwater drainage infrastructure, NaBFID, National Monetisation Pipeline, Infrastructure Investment Trusts, G7 countries, Blue infrastructure, indian express, indian express news

Indian regulators have announced a framework for green/blue bonds, and green deposits

Namita Vikas

June 28, 2023 09:52 AM IST First published on: Jun 28, 2023 at 06:34 AM IST

The National Bank for Financing Infrastructure and Development (NaBFID) lifts the heavy burden of implementing the National Monetisation Pipeline (NMP) and financing projects in the National Infrastructure Pipeline (NIP). To finance India’s infrastructure needs, NaBFID has disbursed 60 per cent of the Rs 25,000 crore loans that it has sanctioned. The bank has recently declared its intent to introduce takeout financing products, invest in Infrastructure Investment Trusts (InVITs) and refinance loans. Many of these plans are welcome. Nevertheless, a few words of caution are warranted.

Integration of climate risk in NIP is largely limited to building for acute physical risks, such as disasters and extreme events. Building resilience against chronic physical risks like rising temperatures or accelerated loss of biodiversity finds space in the broad policy recommendations, but not in the sectoral needs identified. Contrary to the global trend in the adoption of nature-based solutions and embracing green and blue infrastructure, NIP continues to focus on traditional grey infrastructure. For instance, it champions the improvement of stormwater drainage infrastructure and eschews integrating green infrastructure — like green roofs — that global cities are adopting for flood mitigation.

While the G7 has supported mandating disclosures, under the task force on climate-related financial disclosures, for banks and companies, these largely remain voluntary, especially in India. Extending business responsibility and sustainability reporting (BRSR) to the top 1,000 listed companies is an encouraging move. However, efforts to mainstream sustainability and climate resiliency remain, by and large, a matter of rhetoric, and the subject of a few declarations.

Operationalising these concepts and mainstreaming their implementation is a time-consuming effort and the lack of expertise makes the task complicated. Therefore, ensuring the flow of funds to sustainable projects can prove difficult.

More importantly, there is a growing consensus that climate change poses financial risks. Insurance companies exiting California in the face of wildfires are telling examples of the risks faced by financial institutions in a world plagued by climate disasters. Central banks globally have initiated stress testing measures to gauge how their portfolios would fare in varying climate scenarios.

Indian regulators have announced a framework for green/blue bonds, and green deposits. They also intend to propose guidelines for climate stress testing. Identifying relevant climate risks, correlating them to financial risks and quantifying them is a complex process. The procedure is compounded by the fact that credit risks have also to be accounted for. That’s why financial institutions are struggling to accomplish the procedure.

Addressing climate-related financial and infrastructure challenges requires NaBFID to focus on structural measures that improve asset provisioning and quality as well as produce returns on investment.

Engaging private finance in infrastructure projects through public-private partnerships (PPPs) often leads to cost overruns and delays. India’s experience with PPPs has been a mixed bag. NaBFID is well-placed to consider recommendations on investing in pre-planning and site investigation, adopting a collaborative planning process with departments and downstream contractors involved to enable the success of PPPs. Moreover, plans to proceed on the takeout financing route need an assessment of how broad-based growth and demand for credit would be.

NaBFID could also draw from the India Infrastructure Finance Company Ltd’s experience.
NaBFID needs to take advantage of innovative financial products that have proliferated in a bid to mainstream climate adaptation and mitigation. Green bonds, sustainability-linked bonds, and transition bonds all seek to divert global financial flows towards projects aimed at climate mitigation and resilience. General purpose and use-of-proceeds bonds can be powerful instruments to generate funds. On the back of the success of India’s sovereign green bond, issuances by NaBFID for private placements could increase green capital flows to infrastructure. This could be in line with its objective of indirect lending and attracting investments from the private sector.

In recent years, transition bonds have also gained popularity. They finance projects that are not entirely green but are attempting to reduce their emissions. This segment could be the next big opportunity for NaBFID.

Employing entity-level and project-level safeguards to direct funds to appropriate projects, through innovative financing structures, would attract a diverse investor base and enable scaling of finance. Most transition bond frameworks, for instance, recommend an entity-level transition plan. Employing disclosure standards like those framed by global agencies such as the Task Force on Climate Related Financial Disclosures would be useful to enhance transparency, credibility and avoid potential hazards of greenwashing.

Applying new emerging standards for infrastructure projects, given their impacts on biodiversity and existing natural infrastructure, could go a long way in building climate resilience and integrating nature into its decision-making.

The writer is Founder and Managing Director, auctusESG

# Indian infrastructure