Cost Of Meeting Paris Agreement Target Could Be Up To 4% Of Global GDP: Namita Vikas, Group President & Global Head, Yes Bank
In the fight against climate change, financial institutions have a big role to play to fill the funding gap required to effectively tackle environmental issues. 2016 was also the best year ever for green finance. Simply put, green finance covers the financing of investments that generate environmental benefits as part of the broader strategy to achieve inclusive, resilient and sustainable development. In 2016, G20 heads of state for the first time recognized the need to ‘scale up green finance’. In an exclusive interview with BW Businessworld, Namita Vikas, Group President & Global Head, Climate Strategy and Responsible Banking, YES Bank, discusses the various elements of green finance
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Why is climate finance integral in today’s time and how can financial institutions help in the fight against climate change?
Climate change has emerged as one of the most pressing challenges that the world faces today. 2016 and 2017 have been two of the hottest years ever recorded, and globally, instances of extreme weather are on a rapid rise. This poses a significant threat to the global economy in the short term, with devastating impact on the entire population in mid to long term. It is evident that a course correction of the present growth path has become imperative. The global leaders, acknowledging this fact, have already initiated collaborative efforts in the fight against climate change, with the Paris Accord setting a milestone in bringing 197 nations together through commitments in the form of ‘Nationally Determined Contributions (NDCs)’ to reduce their emissions and work for mitigation and adaptation measures.
Mark Carney, the Governor of Bank of England, noted that climate change initiatives are a USD 7 trillion funding opportunity for capital markets, making this highly relevant for financial institutions. Finance is a critical component in the global fight against climate change, especially for emerging nations like India that face other socio-economic developmental challenges as well. Meeting the NDCs for India is expected to cost about USD 2.5 trillion, which would include lowering the emissions intensity to 33–35% (below 2005 levels), increasing the share of non-fossil based power generation capacity to 40% (equivalent to 26–30% of generation), and creating an additional (cumulative) carbon sink of 2.5–3 GtCO2e through additional forest and tree cover. This transition to a ‘low-carbon economy’ is entirely dependent on the mobilization of large financial resources needed to engineer the changes necessary to achieve climate related goals. Hence, a lion’s share of the work has fallen onto financial institutions (FIs), to redirect finances for greening the economy.
FIs would have to play a pivotal role in the creation of a green finance architecture that could support emerging green businesses, through stringent environment and social risk assessment. FIs would also have to employ innovative mechanisms of financing in this changing time, which could speed up mobilization of resources and quicken low carbon transition. The emergence of new financing mechanisms such as green bonds, risk sharing instruments, blended financing mechanisms (that combines public and private finance) provide evidence of the critical role that FIs can play in financing climate action.
What are the economic losses which India can incur due to climate change factors?
A book published by OECD titled ‘Economic consequences of Climate Change’ states that in the absence of further action to tackle climate change, the combined negative impact on global GDP would vary between 1-3.3% by 2060. As the temperature could rise 4°C above pre-industrial levels by 2100, the GDP may see a 2-10% negative impact by the end of the century, compared to the no-damage baseline scenario. Needless to mention, a significant chunk of which would have to be borne by India, with the second largest population.
On the other hand, a recent report by Global Development and Environment Institute finds the cost of meeting the Paris agreement target to be about 1.5% of world income - but this is under best case assumptions of international cooperation. Under less favourable assumptions, costs are estimated to rise above 4% of global GDP.
As per the recent study done by International Monetary Fund (IMF), India is one of the most vulnerable countries to climate change. 1˚C increase in temperature will reduce per capita GDP by 1.33%. With significant impact on resource availability, climate change would lead to a crisis in food security, water security and mass migrations. Apart from the negative effect on the economy, overall living conditions will likely deteriorate.
In view of these, it has become imperative to ingrain sustainability in business strategies and operations that can limit exposure to climate-related risks, while contributing to sustainable development locally and globally. Given India’s strong focus to emerge as a developed nation in the near future, the country would need to address this future GDP loss that could affect its growth path.
What is the importance of the measurement of the value of natural capital?
Natural Capital forms the foundation on which economies are built, on which they develop and flourish, being the raw material for most economic activities. However, the use of these resources at market price has the risk of under-measuring the value of these critical resources, primarily because of the interlinked nature of resources. For example, forests provide a host of tangible and intangible services like clean air and water, which would come at a cost if forests are cleared, however, this future cost of clean air and water is not taken into account while forest land is being diverted for other activities.
The current methods of valuing natural capital would need to be rethought, for economies willing to ensure integration of sustainability. This redesigned valuation needs to be holistic, taking into account the impact on the ecosystem, from which the natural resources are extracted, utilized and then released into. Mainstreaming true value of natural capital and arriving at the true cost of the products and services that use natural capital, is necessary for driving sustainability into the larger public consciousness. A number of natural capital accounting systems have been developed over the last decade, which have enabled various global companies in decision-making that is longer term and sustainable in nature.
YES BANK truly believes that natural capital accounting is the need of the hour, and YGI’s recently released report Valuing Natural Capital: Applying Natural Capital Protocol establishes a business case for doing so, through demonstrating a case study. The report uses the Natural Capital Protocol, an internationally accepted framework for natural capital assessment for arriving at the risk-adjusted value of water, which is comparatively much higher than the current value. Many European countries have already started accounting for environmental impacts, through encouraging organizations to internalize the costs of environmental and social impacts. The Government is acknowledging these global trends and India is bound to witness something similar in the short to medium term, and India Inc, comprising financial institutions, would need to be ready for integration.
What are the new sources of financing renewables in India that can be explored in India?
In the past few years, India has witnessed increased investments in renewable energy, driven by the ambitious target of achieving 175 GW capacity by 2022. New financing mechanisms such as green bonds have emerged and have taken the market by storm, reaching about USD 5 billion in both offshore and onshore issuances. YES BANK is proud to have initiated this market movement in 2015, which is bound to grow further in the coming years, with support from regulators and policy-makers. India is yet to witness blue bonds – bonds dedicated to water infrastructure; and SDG aligned bonds to finance India’s SDG commitments.
We may see in the near future the revitalization of municipal bonds as well, with the potential to be classified as green. In June 2017, the six-fold oversubscription of bonds issued by Pune Municipal Corporation for water infrastructures provides evidence of this renewed interest in municipal bonds.
A few more opportunities could be explored in India - Green Asset-Backed Securities holds enormous potential, on the back of rising investor interest, it would just be a matter of time that India’s first Green Asset-Backed Securitization turns into reality.
Blended finance, that leverages public or philanthropic funding to the crowd in private investment, also holds enormous potential in India. This financing instrument has enormous applications in the adoption of solar and wind energy for agriculture and other energy-intensive businesses, especially in the unorganized sector.
Yield Cos provides for an alternative funding model that is still to be established in India. Operating assets are pooled together under a Special Purpose Vehicle, which provides for low-risk return opportunities to financiers. Yield Co model could prove pivotal in raising alternative resources to capitalize investments such as long-term capital from provident funds, pension funds and insurance companies.
What are the different components of Responsible Banking?
Responsible Banking has been an ethos at YES BANK, and links sustainable development with stakeholder value creation through innovative business solutions and services, weaving sustainability principles within its core operations.
The first facet of responsible banking is facilitating sustainable finance - The Bank has developed innovative ways to finance projects that have significant environment and social impact.
- A proactive approach to Green Financing: YES BANK has issued India’s first green bond and is the first among emerging economies. Till date, the Bank has issued three green bonds and raised around INR 1,645 crore to invest in renewable energy projects (Solar, wind and small hydel projects). Development financial institutions like FMO and IFC have subscribed these green bonds.
- Innovations for the Bottom of the Pyramid: The Bank has specialised solutions for the Bottom of Pyramid which go beyond the realm of financial inclusion. It has piloted a unique model of blended finance which pilots a financial structure that can progressively facilitate economically and environmentally sustainable social business projects.
- Environment & Social (E&S) Risk management: The Bank has an environmental, social governance framework which is integrated with its risk management. The Bank works with the borrowers on identifying E&S gaps and helps the borrowers address these gaps by proposing solutions. This has not only helped the Bank in addressing the non-financial risks in the portfolio, but also build stronger customer relationships.
The second facet of Responsible banking is proactively investing in positive impact sectors. India is the only country in the world to have mandated developmental agenda for Corporates through the CSR mandate in the Companies Act 2013. YES BANK has taken an approach to creating unique, scalable and sustainable models under its CSR, demonstrating exponential impact along with a business case.
The Bank has identified two focus areas - Livelihood and Water Security, and Environment Sustainability - and aims to achieve significant impact through strong partnerships. YES BANK has scaled up its initiative of providing access to safe and clean drinking water and has already provided access to nearly 5 crore lives since its inception in FY2015-16. The Bank also addressed energy efficiency needs in the MSME sector, which is a critical contributor to India’s growth. 2,229 MSMEs were educated on energy efficiency and occupational health and safety of their workers in FY 2016- 17, thereby helping feed into India’s larger goals of creating a low carbon economy. The Bank’s unique flagship community engagement initiative has delivered exponential impact, by working on socio-environmental issues of national importance like financial literacy, Swachh Bharat, road safety, energy conservation and creation of a carbon sink through tree plantation, touching 20 lakh lives through the last fiscal year.
The third facet of Responsible Banking is Policy Advocacy through Cutting Edge Research and Thought Leadership
Since inception, YES BANK has followed a unique knowledge-based approach that provides its stakeholders, including customers, regulators, policymakers, industry associations, and others, with well-informed and customized solutions.
- Voluntary Guidelines on Responsible Financing for India: While proactive approaches like E&S risk management guide responsible investments, lack of market guidance or level playing field is seen as a challenge in India. YES BANK has deeply engaged with regulators and policymakers in promoting green finance, and for market standardization on green bonds.
- Global Engagement on Sustainable Development: YES BANK has taken a leadership position among its Indian banking peers in mainstreaming the sustainable development agenda at the global stage. As a signatory to key global coalitions, such as the UNEP Finance Initiative (UNEP FI), UN Global Compact, the Natural Capital Finance Alliance and CDP, the Bank has put forth Indian viewpoint on key issues such as climate change, responsible finance, and natural capital.
In addition to these, Responsible Banking also drives triple Bottom Line Reporting for the Bank, i.e. a bottom line that is not limited to profits but also includes the planet and people. The Bank follows an approach of measuring and reporting the value of six Capitals – Financial, Social and Relationship, Human, Intellectual, Natural, and Manufactured capital. The premise is based on integrated thinking with a correlation between financial and non-financial performance. Due to its highly progressive disclosures, YES BANK is the only Indian Bank to be listed on the Dow Jones Sustainability Indices (DJSI) as part of their Emerging Market Index for 3 consecutive years (2015-17). YES BANK has also been assigned a ‘AAA’ rating on its ESG performance by MSCI, ESG Research and has been included in 2017 FTSE4Good Emerging Index in 2017. This has resulted in higher investor confidence and trust in the Bank.
How does the landscape of green financing look globally?
Recently, we are witnessing a surge towards green finance globally, especially, post the launch of SDGs in September 2015 and the Paris Accord in December 2015. The formalization of the Paris Accord at COP 22 in Marrakech has further bolstered development in this direction with developed countries reaffirming their USD 100 billion annual mobilization goal by 2020 to support climate action by developing countries. The G20 summit at Hangzhou was instrumental in identifying the need for a green architecture across member nations, setting out a series of steps to scale up green finance.
The global renewable energy capacity has reached 2006 GW in year 2016, a 131 GW increase from 2015. The green bond market saw a rapid growth with issuances doubling to USD 81 billion in 2016, from USD 42 billion in the year ago. This year, green bond issuances are expected to reach a record high of USD 130 billion.
In recent years, we have seen an unprecedented interest in green investments among global investors. This has prompted many global movements, including recommendations by G20’s Task Force on Climate related financial disclosures. This encourages streamlined non-financial disclosures and highlights the criticality of boards in driving action. This would not only enable the companies to be more transparent, but also facilitate better decision making by investors.