RBI recommends pooling viable projects to attract climate finance
While the nascent idea has potential, concerns such as taxonomy, risk management and project viability, will need to be addressed, say experts
Kundan Pandey/Mongabay India
The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, has advocated for creating a pool of bankable projects to increase the flow of climate finance. Speaking at an RBI seminar on climate change risks and finance on March 13, Malhotra pointed out that Indian banks and non-bank finance companies (NBFCs) have limited capacity and expertise which further limits their ability to assess and finance climate change mitigation projects well. It increases the risks associated with funding these projects.
Having this pool or collection of financially viable and investment-ready projects can offer multiple benefits, said the governor, suggesting that experienced financial institutions that operate under RBI supervision can contribute to this pool of projects and exchange information.
Riya Saxena, a climate finance expert at the think-tank RMI India, noted that while details are still awaited on the RBI’s proposal, a pool of bankable projects could involve curating well-structured projects with clear revenue streams and if needed, credit enhancement mechanisms like guarantees. “Given the high upfront costs, long gestation periods, and lack of secondary markets for emerging green technologies, traditional credit rating frameworks often assign higher risk to these projects,” she said. While sectors such as utility-scale solar have successfully built bankable projects with ecosystem support, many emerging technologies still require intervention. “Addressing these gaps would potentially help create a pipeline of projects that are ready for financing by banks,” she added.
At the RBI seminar, the governor also spoke about the limitations of assessing climate projects using evolving technology. He said that green financing or lending for sustainable finance has higher credit risk compared to financing other types of projects because borrowers use new and emerging green technologies, which have relatively limited track record in terms of reliability, efficiency, and effectiveness. Currently, regulated entities may not have the capacity or technical know-how to assess these projects and hence, he said that they need to develop the skills and knowledge to improve risk assessment for financing projects using emerging green technologies.
However, experts caution that the success of this concept of pooling projects for attracting investments will depend on agility, taxonomy and risk management.
Srinath Sridharan, Corporate Advisor and Independent Director on Corporate Boards, said, “A shared, common climate taxonomy, which is underway, is essential for effectively pooling assets and financing climate initiatives.” He acknowledged that taxonomy has been under discussion for some time now and welcomed the announcement in the 2024 annual budget. Sridharan highlighted the importance of a harmonised approach across financial regulators and commended India’s proactive regulatory efforts in adapting to the rapidly evolving climate finance landscape.
Suranjali Tandon, Associate Professor at the National Institute of Public Finance and Policy (NIPFP), expressed scepticism about the idea, questioning whether bankable projects are truly facing funding gaps. “If a project is bankable, it should have received funding anyway — unless the issue is scale,” she said.
Tandon also raised concerns about pooling non-return-oriented projects with return-oriented ones, suggesting that such a model would require cross-subsidisation and might only work if both types of projects belong to a single entity.
Climate challenges and climate finance
India “needs a substantial amount of climate finance in order of tens of trillions of dollars by 2050 to achieve its ambitious sustainability targets,” stated a report published by the International Finance Corporation (IFC), a World Bank group. The report also addressed the gap in existing funding. It says that from 2026-2030, India will require annual clean energy investments of $253-$263 billion (rising to $325-$355 billion over 2031-2035) to align with sustainable development and climate goals. It refers to other estimates that consider the investment gap (the difference between what is required and what could reasonably be made available from conventional sources) to achieve net zero by 2070 and suggests that the required total fund amounts to $10.1 trillion. However, India’s current investment in climate action is only $44 billion per year.
The global negotiations around climate finance at COP29 in Baku last year ended in disappointment, with developed countries promising $300 billion by 2035 in funding flow to developing countries. The majority of the financial burden, thus, falls on local action. This featured in the RBI governor’s speech as he listed what RBI is doing to deal with future climate challenges.
In October 2024, the RBI created a dataset repository, called the Reserve Bank–Climate Risk Information System (RB-CRIS), to fill the data-related gaps in climate-related financial risk modelling which is data-intensive. This repository arose from the fact that there is not enough data available to measure the financial impact of climate change which limits assessment of climate change risks.
Previously, in February 2024, the RBI issued draft guidelines on the Disclosure Framework for Climate-related Financial Risks, which mandated disclosure by regulated entities, for public consultation. And in April 2023, the RBI introduced the Framework for Acceptance of Green Deposits to enable banks to increase credit flow to green activities.
Tandon said that these efforts by the RBI reflect the need for significant domestic action on climate financing. “While global discussions, such as those in Baku during COP29, are crucial, we know that external sources cannot solely fill that shortfall. Therefore, we must think about what we can do within our market. And I guess banking and NBFCs are a large part of India’s finance landscape,” she added.
Sridharan further emphasised that climate finance is not just about funding new transitions but also about strengthening the resilience of the Indian banking system. He pointed out that climate-related financial risks extend beyond new financing to existing loan portfolios, stressing the need for a comprehensive, forward-looking approach to managing these risks.
(The article was first published in Mongabay)
Banner image: Union Minister Piyush Goyal looks at exhibits of green technology at IIT Madras, Tamil Nadu in 2016. Image by Ministry of New and Renewable Energy (MNRE) via Wikimedia Commons.
