India 2070 & the new ‘AEIHM’
India has committed to an ambitious Mission 2070 Net Zero goal in the recent COP26 summit in Glasgow. This will potentially drive speedy transformation across the entire value chain of the five sectors that have maximum outcome of the Net Zero goal. This aim would be AEIHM sectors : Agriculture,Energy, Infrastructure, Heavy industries, Mobility. These sectors define where we work, what we eat and how people, goods and services are transported. And, their adverse impact on environment is high.
This mission is estimated to need investments of USD 15 Trillion-dollar over the next 40 years. This would help in bringing in newer and innovative technologies, to catalyse green-transforming the fossil-industries, to push industry change from legacy processes and plants to sustainable-ones, to build green infrastructure, and to bring in large scale carbon neutral technologies.
In this investment journey, a key enabler and the building-block in India’s journey to Net Zero will be a functional green finance sector that should mobilise the required capital. A study by the Climate Policy Initiative (CPI) said that India could mobilise only USD 18 billion in climate investments in 2018 compared to the annual requirement of USD 160 billion.
According to a RBI Bulletin January 2021 , “In sum, green finance in India is still at the nascent stage. Green bonds constituted only 0.7 per cent of all the bonds issued in India since 2018, and bank lending to the non-conventional energy constituted about 7.9 per cent of outstanding bank credit to the power sector, as on March 2020.” The report also mentioned that the development of green financing, funding of environment-friendly sustainable developments are not without challenges, which may include false compliance claims, misuse of Green Loans and most importantly and maturity mismatches between long-term green investment and relatively short-term interests of investors.
Damned data, gaps and constraints
For successful outcome of any project, it is essential to track the milestones with absolute honesty. In the effort of tracking green financing initiatives in India lies an simple yet incredible obstacle - “Data governance”.
The issues range across the (lack of) availability of data, veracity of data format, source of data collation, quality of data, and consistency of data over a time-frame. It is still pertinent to remember the ever-relevant quote by the famous statistician Edwards Deming - “In God we trust. All others must bring data.”
Non-availability and trackability of disbursements: The existing Public Finance Management System, in its current form, does not provide consistent and granular information about the flow of finances and end-use. An effective mechanism of measurement, reporting and verification is essential for such a large investment expectation. The central and state governments use their public enterprises for the deployment of green-funds; many of them also function as a source of green finance themselves, and use varying systems and data reporting formats. Hence it is imperative to ensure that their contribution is measured in detail to avoid any double-counting in the national green-investing or green-funding initiatives.
Public tracking of green-funding : Despite an increase in sustainability reporting in India, the relevant information on private investments is sketchy. Many organisations struggle to accurately measure sustainability impact, because relevant data is not being collected or is of poor quality. There is a disparity between the large and other companies, with the former being able to invest in various tracking methods and processes. Alsomany private companies’ green-investments are accounted for as their usual business expenses in their accounting methods.
Data is lumped & dumped : in India, different states and central governmental departments manage their budgetary data. The data format and granularity of these budgets are not common and hence creates the need for assumptions to be made in any green financing project effort.
Green-tagging data : The lack of a harmonised green finance taxonomy in the country, and non-standardised reporting of data makes green tagging of domestic entries arbitrary, and randomness of data management left to the user’s discretion. For example, even the budgetary provisions and policy documents of the governmental entities use different terminologies or codification to mean the same item heads !
Indian banking’s green-database : The absence of a centralised dataset on green lending by Indian financing system was particularly challenging to account for private debt. The Indian banking system should push for better quality and deeper data sets around Indian industries and their efforts towards green-business. After all, without the right data, both credit decisions as well as viability would be suspect. And we might fall prey to green-washing the actuals.
Globally, financiers have started taking tough decisions including cancelling loan sanctions & disbursements, when the companies they finance do not meet sustainability standards. Will the Indian lenders have the courage, and the regulatory ability to take such strong stand with their larger corporate clients ? It would be useful for Ministry of Finance to publish an annual update on the progress of the Indian financial services sectoral efforts in the journey towards Net-Zero.
Missing Public database : For a nation looking to bring in USD 15 Trillion investments, data governance becomes a basic-ask ! Hence a public database that would be low-cost to use, is needed in tracking both public and private green-investments. Since XBRL is the data format that banks use for data-reporting, it might be useful to continue with this standard.
Data to investments
In the arduous journey towards India’s 2070 Net-Zero goal, the cost of green-finance would be important to control. But the cost of human capital would be far more expensive for humanity to bear if we don’t meet our goals. No doubt that the access to larger quantum and sources of green finance would help fast track Indian economy to go green over the next few decades. A well-designed green finance taxonomy can avoid data mixup, reduce transaction costs and encourage the development of green-sectors. Lenders need a NET-Data of a different kind : the data they can depend on with Neutrality, Emphasis, Transparency.
To this effect, India needs to place emphasis on data governance as the starting point for green finance !
Columnist
Strategic counsel for over 27 years, with leading corporates across diverse sectors. Independent Director across multiple sectors. Advises organisations on the intersection of finance, digital, consumption economy, GEMZ (Gig Economy, Millennials, gen Z) & ESG. Coaches & mentors senior leaders. Active engagement across industry-growth policy conversations & public policy issues. Visiting faculty at various management schools and with regulatory learning centres. Prolific media columnist across topics he works with. He is also the Editor and co-author of ‘Time for Bharat’ (book on public governance). Visiting Fellow at the Observer Research Foundation. Posts all published work at https://srinath.blog
