Mint Sustainability Summit: Easing ECB norms, making green bonds more attractive to aid climate financing

Government-led efforts such as making green bonds more attractive or providing incentives for foreign capital could go a long way in attracting environmental, social and governance (ESG)-related investments into the country, according to Neeraj Menon, partner-projects, ESG, Trilegal.

“There is a huge ECB (external commercial borrowing) market that is untapped,” Menon said at the Mint Sustainability Summit 2024 on Tuesday.

Despite the availability of capital, constraints on spreads and caps have made ESG investing less attractive. Similarly, measures to facilitate better credit rating for green bonds or fiscal incentives would help make the segment more attractive to incoming capital, he said.

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“From a policy perspective, there is still a lot more thinking required on the future path of climate change and how to make our industry and economy more aligned with that,” said Menon, adding that this regulatory and policy certainty will help ease the implementation of these social projects.

“Can the government do more to get more capital for this sector? Absolutely, yes.”

While countries with mature economies should ideally lead the way and drive innovation and transformation, there is no differentiation in corporate climate action structures across countries, said Prajna Khanna, global head of sustainability, Prosus Group.

This discrepancy between national-level targets and corporate-level goals, without enabling frameworks, infrastructure and financing, which are more readily available in mature economies, will ensure that corporates in the Global South face a longer and deeper struggle in achieving their targets.

“The only way to demonstrate or assess how a company is actually transitioning or making progress on its commitments is third-party verification…and not self-proclaimed targets,” said Khanna.

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Major challenges in infrastructure projects such as roads are biodiversity and flood risk due to constant weather changes, said Ashok Emani, director-ESG at National Investment and Infrastructure Fund (NIIF).

The country is seeing good investments in ESG-related projects, but there is a need to develop a risk-management approach for these investments. It should include a detailed investigation of climate risk and factors such as social protests, which may lead to geopolitical issues.

“If you take a road or any other project that has to be looked at from the ESG lens, say, in terms of the physical climate risk, it is very important to have the like assessment done,” said Emani.

While it is easier to set targets, how the issues will be addressed still needs to be figured out, said Shiva Shanker, investment director, Ankur Capital, adding that attention is growing towards areas related to optimising strategies and analysing weather parameters, but these models will be slightly tougher to evolve.

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“There is a diversity of investment products required to help us accelerate the mitigation process, and just the process of all businesses transitioning from where current baselines are to where they need to be,” said Shanker, giving the example of localized agri-insurance solutions for farmers.

The focus of both the government and corporates needs to be on R&D (research and development) to eventually allow investors to assess their portfolio companies not just on the basis of financial returns but also on social and environmental returns. This is especially important for financial startups, scale-ups and unicorns where the goal is public listing or exit, and ESG compliance is the easiest way to make these companies more attractive investment opportunities.

“Across multiple types of financial instruments, whether it's debt, equity, structured finance, project financing, I think the penny has to drop, and the connection has to be made between climate risk and environmental risk, environmental impact and financial or credit risk, said Khanna.

Menon added that while earlier due diligence comprised 4-5 broad buckets, today the ESG diligence is undertaken by most sophisticated investors, both domestic and international, in addition to clauses being built in for the achievement of certain ESG goals.

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“There is a sizable amount of money coming in for climate mitigation, but these are focused at sectors that are probably green, or almost green. The challenge lies in climate financing for energy transition, or climate transition and climate adaptability. These are two sectors where we don't see as much money coming in,” said Menon, citing the example of affordable housing construction. 

He also highlighted the crucial role of urban planners in public infrastructure projects. “It’s clear we’re at the point where adaptation has become, from a hypothetical situation of do we need adaptation resilience to be a big part of where global capital flows go, to a big problem that does need to be addressed,” said Shanker.