Sustainable financing was developed to answer one of the most important questions in the development world: how do we catalyze funds for overhauling economic, health, civil ecosystems to reduce emissions and work towards reversing the trajectory to a climate catastrophe?
Unmitigated climate change is likely to cost $35 trillion to India’s economy alone. Climate change, for this reason, has been termed by many private corporations as a once-in-an era economic opportunity. Climate financing incentivises multiple stakeholders and sectors to adopt climate friendly practices and creates a market that allows a wide range of contributors to invest, trade, receive funding, among others to promote innovations and interventions that mitigate climate change and help systems adapt to extreme conditions that accompany it.
Private Sector Strategies
Even though there has been hesitancy for “green initiatives”, the private sector, with its financial clout and penchant for innovation, must play a leading role in the path to a greener future. As green technology prices plummet, penalties for carbon emissions and unsustainable practices increase, and climate catastrophes destabilize the economic environments for small and large businesses alike, moving towards carbon neutrality is just a smart strategy.
Companies can implement a variety of strategies to begin their green journey.
Focus on Internal Operations
Incorporating greener operations has become easier and better for the bottom line.
To start, a company needs to begin by setting their green goals that align to their company values. Some set an ambitious carbon net-zero goal, while others set more flexible goals focusing on transitioning to renewable energy or more carbon friendly work policies. However, as rules become more stringent and public scrutiny more glaring, ambitious goals are now the norm. Once a target has been set, projects and areas of operations are identified to revamp.
Once the context is in place, the meat of the matter remains: how do we mobilize corporate financing to fund these projects. Climate finance comes into play with a plethora of financial toys. Corporations can buy green bonds, take on green loans or sustainability loans, and if current regulations exist in the country, reduce greenhouse gas emissions below their allowance to sell their carbon allowances or carbon credits. If carbon pricing isn’t government mandated, companies are encouraged to develop their internal carbon pricing mechanisms that monitor and document cost savings with a reduction of every metric tonne of emissions.
Tools such as The Corporate Climate Finance Playbook allow companies to pick the correct finance tools for their goals and assess risk based on their choices. Companies need to keep in mind that regulatory mechanisms are constantly changing in this space as governments transition to low to no-carbon economies and plan strategies accordingly. Robust monitoring and reporting mechanisms need to be in place as governments begin to demand increased transparency (E.g. the BRSR scheme launched in 2021 in India).
Invest in External Climate Financing Tools, Projects and Innovations
Investing externally is crucial to catalyze new climate innovations in the private sector. This could be in the form of investing in financial tools such as bonds, blended financing instruments for climate-based companies, projects being implemented through external parties, financing innovations or companies developing tools to mitigate climate change.
According to Future Market Insights, the climate technology sector is set to grow at a CAGR of 24.2% between 2022 to 2032. It is currently valued at $13.8 billion (2021) and is expected to reach $147.5 billion by 2032. To gain an early mover advantage, investment in R&D of technologies in the climate space has to happen now. India especially has seen an immense rise of startups. With 2,260 climate tech companies, India has achieved the world’s third largest climate tech space. India could stand to gain an $11 trillion influx if it were to become the leader at developing and exporting climate solutions.
Mitigate Climate Risk
As the severity of climate disasters increases, governments and companies need to ensure that their economic ecosystems can withstand large scale natural disasters. In disasters, every second counts, and having access to immediate funds could be the difference between well-handled disasters and immediate recovery vs. worsening complications from the disaster aftermath and a more costly recovery.
India’s risk preparedness and risk transfer still remains minimal when it comes to natural disasters. Individuals and companies have few options through banks, with limited instruments that allow them to process natural disaster claims, especially those related to climate change. However, as (re)insurance becomes more commonplace, banks will have an opportunity for further risk transfer that may incentivize growth of climate and catastrophic (climate) related insurances for individuals and companies.
Another form of risk transfer would be to participate in Public Private Partnerships (PPP). This risk sharing between private and public offers the private sector larger impact opportunities to streamline resources, leverage their own expertise and operations while still sharing risk. Although there are a multitude of PPP models, this medium is rife with opportunities for the private sector, especially in India where multiple state governments are actively recruiting private sector support in climate change infrastructure building and restructuring.
As the world desperately moves towards carbon neutrality, it is important that the private sector acknowledge that climate change threatens their place and future and recognize their role in building a greener world. New markets, financing instruments, and modes of collaboration offer amazing incentives for cleaner operations, innovations, and companies that better the climate.