October 18, 2023

Everything you need to know about climate finance

Rathish Balakrishnan, co-founder of Sattva, and Varad Pande, a sustainability and impact investment expert, delve into the climate finance landscape and explore necessary changes to fund our climate goals.

5 min read

Decoding Impact is a podcast by Sattva Knowledge Institute that delves into complexities surrounding development solutions in India. In this episode, host Rathish Balakrishnan chats with Varad Pande, a climate finance and investment expert, and partner at Boston Consulting Group. The conversation covers the current gaps in the climate finance landscape, the need to look beyond mitigation, and the importance of a collaborative ecosystem.

Here’s an edited excerpt of the episode:



The gaps in climate finance

Varad: We are talking and having conversations about billions, right? So we need two more zeros to be added to this conversation. We are negotiating about billions here and there, right? So I think that’s really the problem. And there are two aspects to this, to this piece. You know, the one is just this financing gap issue. Lots of studies have now been done on how much money does the world need to address the climate problem, to become net zero by 2050, to stay under 1.5 to 2 degree Celsius temperature rise. All of them say we need something in the region of 3–5 trillion dollars a year, right. And currently, if you see the numbers, if you add up everything that is being spent on climate-related stuff, it’s about 600 to 700 billion dollars… The second aspect of the funding problem is the misallocation of capital…

80% of climate capital is still going to the developed countries.

80% of climate capital today is going to just two sectors—electricity and mobility. Other high-emitting sectors such as agriculture, industry, whether it’s steel, cement, aluminium, are deeply underfunded and very, very hard to change.

80% of climate capital is still going to the developed countries, while the social return on investment is much higher in the Global South. Why? Because these countries are not yet locked in to the high carbon pathways that the West has used over the last hundred years.

Adaptation, resilience and loss and damage, I would argue, are the stepchild in the climate finance debate. All the attention and focus and 90% of the money is going to mitigation. So we have two levels of problems. One is just the absolute money problem where we are 5X off and the capital misallocation problem, which is whatever is coming in, is not going to across all the things that really matter…

There’s this long standing number which has been floating around in the climate talks since 2009, Copenhagen, which is that developed countries will make available $100 billion a year to developing countries as climate finance. We are in 2023. We are still not, we’ve still not even reached 100 billion. Right. And remember where we started? We need 3–5 trillion dollars a year.


The need for public private partnerships

Varad: We need a new paradigm of public private partnership… this version of public private partnership should be about getting public funds as catalytic capital. And private funds then to come in to take advantage of that capital and those private funds can be 8-10X of the catalytic money that the public sector puts in. So let me give you an example? Today, funding a solar power project in many parts of Africa is hard. Private sector players are not ready to do it and they give the same reasons. The risk premium of investing is very high. The Economist last week had framed it really well when it said, you know, a solar farm in cloudy Germany needs a return of 7% to be viable. Whereas one in sunny Egypt needs 28% to be viable, right. So, and this is, of course, not unfortunate because Egypt has much more sun than Germany, but the higher risk premium of investing in Egypt makes the expected rate of return much higher. Right. So, in such a situation, if public or concessional capital could come in, right. And provide, say, a guarantee to cover for losses that might arise if certain events happen, for example, a payment default by the utility, or currency fluctuation, or you know, whatever the tariff arrangement is that being changed, right.

So the kind of risks that private sector is not comfortable with taking. Then if somebody is willing to cover this through a guarantee, then it may be possible to convince a large private investor to invest in that plant because it reduces the risk premium and cost of capital and makes the project viable. So that’s really, I think, the heart of the kind of transformation we need. This approach is being called by different names catalytic finance, blended capital, etc. It is beginning to catch on.

one, two, and five rupee coins--climate finance
High-emitting sectors such as agriculture and industry are deeply underfunded. | Picture courtesy: Canva


Building a collaborative ecosystem

Varad: I think we need to create, you know, more forums for countries to exchange how some of this stuff is done. So there’s a whole topic of discussion these days called the Green Taxonomy, which is the idea that investors need to have a clear sense on what is considered green, what is not considered green, etc. And that discussion every country is trying to create their own green taxonomy.

We need that infrastructure to come together and we need to do it in a way that doesn’t get stuck with the UN consensus-building approach because as you said, we are not you know, the Arctic ice is not going to wait for us, right? The fundamental challenge with the UN approach is it’s a consensus-based approach. Everybody has to sign up to everything on that sheet of paper, right? And then that that takes a long time. So I think there is an opportunity there for plurilateral approaches where you don’t need to take everybody along. But can like-minded countries come together and do things? The International Solar Alliance, which India and France started a few years ago and that today has 113 members around the world, is a great example.


Expanding the scope of climate funding beyond mitigation

Varad: The carbon tunnel vision, which is, you know, like everybody is so focused on carbon that it’s like, you know, you only see one. You’re seeing a lot of things there, but you’re only seeing carbon because that’s what you’re focused on. And every adaptation, biodiversity, air quality, water pollution, all of these things get shortchanged, right? And so while, of course, it goes without saying that mitigation is extremely important because we have to change, bend the curve on emissions, I think we are getting somewhat fixated. The challenge is that, look, mitigation is global. The tragedy of commons issue is for mitigation. So really that’s the problem in which we are truly all together. While adaptation is local, right?

That’s one of the reasons why we have so much money flowing into finance, relatively speaking, compared to adaptation. The other issue, of course, is the bankability of projects, right? Like we had this discussion on blended finance. Most of these projects have to be revenue generating projects and a lot of them are mitigation projects. Adaptation is much harder to create revenue streams where the private sector can come in.

The one, I must say, the example that I feel…Really I’m still learning a lot more about this, but the power of things like mangroves. Mangroves are a very interesting thing. You know, they’re very fast growing. They are both mitigation and adaptation. They’re mitigation because they sequester large amounts of carbon very quickly and they’re adaptation because they are also bulwarks against floods. You know, Bombay has fantastic mangroves.

And so it’s magic. It’s like I like, you know, both adaptation and mitigation and they’re source for biodiversity because a lot of birds and fish use them for nesting, right? So there’s a broader nature piece which is also being met by, by mangroves. So I think we need to find these kind of things and give them much more prominence in the discourse than they currently have.

Listen to the full episode here.

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Sattva Knowledge Institute

Sattva Knowledge Institute (SKI) was established in 2022 and is the official knowledge platform at Sattva. It aims to inform impact investment decisions, and shed light on development problems and provide evidence-based solutions.