India has become a staunch advocate of climate justice. At various international forums, it has voiced concern that enhanced climate pledges have yielded an insufficient increase in capital flows to countries in the global south, which are most vulnerable to extreme weather caused by climate change. India’s G20 presidency is an opportunity to steer the forum towards greater cooperation on catalysing climate finance.
Governments, multilateral development banks (MDBs) and private institutions can facilitate international finance. But an increased and fair flow of finance requires a series of reforms. The G20 Finance Track, which brings together G20 finance ministers and central bank governors, and its working groups, such as the Framework Working Group (FWG) and Sustainable Finance Working Group (SFWG), have discussed these reforms in the past. Bringing these discussions to the fore will be critical to mobilising funds for the global south by India’s G20 presidency.
Climate-responsive development banks
MDBs can provide capital for green infrastructure and are a key piece of the climate finance puzzle. Yet, so far, MDB funding for climate-ready projects has been minimal. It is time to make climate change a key parameter of MDB finance and enhance their investments in low-carbon projects. MDB reforms have been under discussion for years. The G20 injected huge momentum into these issues by commissioning an independent review of the MDBs’ capital adequacy frameworks (CAF), which define MDBs’ scope to leverage shareholders’ capital contribution for financing.
MDBs are being encouraged by the G20 to submit an update on the recommendations of the G20’s independent CAF review in Spring 2023 on the sidelines of annual MDB meetings. This will be a key opportunity for India’s G20 presidency to drive climate-smart MDB reforms and ensure MDBs are willing to accept the recommendations, which include redefining risk appetite, revising the approach to callable capital and innovative techniques to create lending headroom.
Interoperable sustainable finance regulations
Green taxonomies have gained popularity as countries commit to net-zero goals and low-carbon pathways. A green taxonomy, in the simplest terms, is a framework that defines environmentally sustainable investments. Consistency in these definitions and frameworks is essential for international climate finance.
Already, 30 countries have developed or are developing green taxonomies. Comparability and interoperability among these taxonomies, and any new ones, are necessary for smooth cross-border capital flow. Their coherent operation will allow stakeholders worldwide to communicate effectively and transparently and help lower capital costs.
G20 central bank governors and finance ministers have recognised the need for consistent and comparable climate-related financial disclosures, something that the Financial Stability Board (FSB), an international body set up after G20 2009 presidency to monitor global financial systems, is actively pursuing.
The high-level principles introduced by the International Platform for Sustainable Finance (IPSF), the United Nations Department of Economic and Social Affairs (UN-DESA), and the SFWG also reflect the need for consistency. They urge for the use of similar language, comparing regional taxonomies to identify common ground, voluntary adoption of common taxonomies or development of unified taxonomies with help from MDBs, leveraging existing platforms and finding ways to standardise disclosures, among other things. Adopting these will improve interoperability, which is pivotal for enhancing climate finance and eliminating greenwashing.
A similar cross-learning approach has also been advocated for Environmental, Social and Governance (ESG) and other sustainability-linked disclosures to minimise reporting gaps and, in turn, enhance capital flow from sovereigns, MDBs and other institutional investors.
India’s G20 Presidency presents an excellent opportunity to address interoperability and consistency as more countries look to finalise their green taxonomies soon. These clear frameworks are essential for eliminating information asymmetry, encouraging consistency and avoiding greenwashing.
Accelerate climate finance from global investors
Private capital from institutional investors and financial institutions is another important pillar for financing the low-carbon economic transition.
Aligning global financial institutions with climate pledges, such as Glasgow Financial Alliance for Net Zero (GFANZ), can help enhance private capital availability. This would result in large investors, insurers and financiers considering climate risks in their investment decisions. Walking the talk on these pledges is the key, and the G20 provides an ideal platform to deliberate on these developments. Additionally, promoting National Development Banks (NDBs) can be useful in providing lower-cost, longer-term financing and crowd-in private investments.
During its G20 presidency, India can look at ensuring financial investors align with global pledges. It can also derive learnings from different NDBs.
Meeting the climate finance needs is urgent. Investing in climate mitigation now can prevent the demand for adaptation later, which can significantly drain financial resources. Countries in the global south must adopt a low-carbon pathway as they also have huge unmet energy demands.
India can spearhead the climate finance discussion and be a voice for the global south. It can do so by bringing various stakeholders to the table to discuss issues of climate-smart MDBs reforms, frameworks for climate-related disclosures, comparable and interoperable taxonomies and alignment of global investors with climate pledges.
Vibhuti Garg is Director, South Asia Institute for Energy Economics and Financial Analysis (IEEFA), Purva Jain is an Energy Finance Analyst, IEEFA, and Shantanu Srivastava is an Energy Finance Analyst at IEEFA
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