Let’s pin down the elusive ‘E’ of ESG transition finance
4 min read . Updated: 16 Jun 2022, 12:16 AM IST
Premium- The development of robust transition finance mechanisms across various industry segments will be our litmus test over the next decade or two.
Sustainable climate funding initiatives that broadly comprise the ‘E’ of ESG transition finance have for long been paid lip service to and perceived as assurers of mere bragging rights. Yet, as Environmental, Social and Governance (ESG) action assumes importance, change is in the air. Considering the frequency with which weather events are impacting lives and given our national commitment to net zero carbon emissions, India Inc—businesses, financiers and regulatory stakeholders—will do well to study the ‘whole-of-government’ approach and come up with a similar workable ‘whole-of-industry investment and financing’ approach to facilitate a sustainable economy.
While commendable capacities have come up for various forms of renewable power, including utility-scale solar power, financed through a pool of bank/financial institution loans, bonds and private equity, much more should be done to enhance investments in round-the-clock renewable energy (RTC RE) supply, as increasingly choosy corporates pursuing sustainability mandates demand 365x24x7 RE via better power storage technologies and energy generators. Further, systemic pain points that hold back the growth of wind and roof-top solar systems and other renewables require policy streamlining.
The development of robust transition finance mechanisms across various industry segments will be our litmus test over the next decade or two. The 3 ‘R’ mantra of recycle, re-use and reduce shall be crucial for principal segments of Indian Industry to combat climate challenges effectively.
Heavy industries like iron and steel can help reduce India’s carbon dioxide exhaust by undertaking incremental capacity expansion through smaller ‘scrap based steel process plants’ (recycling) located near urban centres, instead of adding pollution-heavy integrated factories with blast furnaces that convert ore to iron and basic oxygen furnaces that transform iron into steel. The big reward: scrap production process emissions would be only 0.15 tonnes of carbon per tonne of crude steel, as against the latter’s 2.5 tonnes of carbon per tonne of crude steel. Once deep decarbonization steel technologies develop on a commercial scale, including green hydrogen from electrolysis of water or blue hydrogen from natural gas (where carbon by-products get captured), polluting entities could choose to make the appropriate technology investments.
In the energy and commodities space where coal and hydrocarbons are necessities, refining companies that guzzle finance to the tune of $20-40 million for every imported tanker consignment, could do more, given the sheer scale of their operations. Business and corporate social responsibility support is needed to promote greener technologies and bring about a large CO2 impact. Projects like the afforestation of habitats and revival of lost water bodies need priority.
Power distribution companies can do their bit to support electric vehicle (EV) usage by upgrading back-end transformer infrastructure and raising the sanctioned loads of connections , which remain as low as 5 KWh, leaving little spare load for quick EV battery charging at most alternative-current plug-in points.
In the construction industry, rain water harvesting (RWH) systems should be a strict precondition for issuing building plan approvals to reverse groundwater depletion and prevent urban flooding. If water-challenged Tamil Nadu could successfully implement mandatory RWH for all buildings across urban and later rural areas in the early 2000s, surely such best practices require replication today in heavy consumption areas across the country.
If organizations don’t display enough initiative, regulations will probably tread the path taken by the state for dismantling LPG subsidies for well-off users. First, consumers were requested to give up subvention voluntarily and then the tap was forcibly turned off. Similarly, regulators will have no choice but to follow a 3 ‘C’ script. First coax, then convince and eventually coerce the laggards of India Inc, including financiers, to fall in line for hastening a green transition.
The revamped Business Responsibility and Sustainability Report (BRSR) framework, which requires listed corporates to disclose specific quantifiable metrics under standard templates, and the ESG assessment scores introduced by credit rating agencies, are early moves of this cajoling stage.
European banks like BNP Paribas have taken an early lead by coming out with climate analytics and alignment studies, specifying a carbon transition finance roadmap towards net zero. Recently, interim decarbonization percentage targets were set that envision raising the share of finance available to RE in overall power generation capacity, reducing upstream exposure to oil, and increasing the financing share of EVs in the automobile market by 2025. For these three, the reduced carbon intensity of bank finance can be measured in terms of grams per KWh, grams per mega joule and grams per kilometre driven, respectively. Indian banks need to follow suit by devising their own specific strategies. Most banks in India, however, haven’t yet framed comprehensive climate funding policies, while a few that have taken initial steps in that direction have held their drafted plans in abeyance.
A green economic transition and the financing needed for it should not be elusive buzzwords, but an opportunity that Indian corporates and financiers should act upon right away before climate action regulations start hitting them hard.
Ashiesh Kapoor is a banker and author of ‘Singapore Holiday Travelogue’
