Climate finance for India: Connecting the right tracks for capital flow

(This is part 1 of a 3 part series on climate finance for India. Read part 2, 3 here.)

Climate change poses a significant threat to India’s economic growth and development. It is widely accepted that India needs to invest trillions of dollars to prevent severe economic losses due to climate change. Luckily, several investors have committed billions to invest for climate finance in India. 

And yet, the actual amount of capital invested to date is less than the total capital needed. Investors say there are few investable opportunities. But climate projects and organisations, solving climate issues, claim that finance is not available. 

Climate finance is like a poorly managed railway network

The climate finance situation in India is like a poorly managed railway system. Trains arrive but can’t reach their platforms. High-speed trains connecting major cities are prioritised over regional ones that carry far more passengers. Congestion slows everything down, delaying trains and leaving passengers frustrated.

Why are the climate finance trains delayed? 

Currently, climate finance in India, is focussed on large scale solar or wind parks. These types of projects have many years of investment history. Over time, investors have developed well-defined evaluation criteria. The perceived risk is low, and the investors can invest larger amounts per transaction. Electric vehicles and vehicles financing has recently been able to raise significant capital, largely due to policy tailwinds.

However, smaller climate projects, modern technologies and business models, struggle to secure financing. They have limited operating history and no standard evaluation criteria. This makes them harder and more expensive to assess compared to larger projects. Investing in these projects requires risk appetite and patience.

Lack of investor domain expertise and inability to invest time leads to focus on larger investments: 

Investing in any new area requires a commitment of time and people to build expertise on the relevant sectors and develop sources of deal-flow. Large investors, who deploy billions of dollars with relatively small teams, have to justify such commitments of time and people, especially if it is for sectors or opportunities that do not have a history of raising commercial capital. Often such efforts are found to be wasteful.

Difficult to find common ground for capital sources with different risk- return-impact expectations: 

Philanthropic concessional capital has risk appetite and patience for early and sub-scale projects and technologies, but such form of capital is limited. Commercial investors are not constrained by capital, but they do not have the risk appetite. They may also expect unrealistic financial returns. Concessional capital can promise to absorb the risk and make these opportunities safer to invest for commercial investors. Unfortunately, they do not find common ground to work with each other.

Traditional categorisation of investor types does not suit climate finance: 

Another problem is that investors are normally split into two distinct categories- Venture capital investors providing equity capital and banks providing debt capital. When venture capital investors invest, they expect companies to grow exponentially. When banks finance, they expect hard assets as collateral and years of track record. Significant majority of climate opportunities are not suited for either type of financing. They need something in between. Traditional categorisation of investors leads to climate projects not getting funded.

In summary, the current financial system is like an inefficiently run railway system that prioritizes highspeed express trains and neglects regional routes. It leaves out impactful projects that affects most of the people.

(This is part 1 of a 3 part series on climate finance for India. Read part 2, 3 here.)