Transition Finance: Balancing profits and sustainability

 

The burgeoning Indian economy is at a critical juncture. The country is on a strong trajectory as it sustains a healthy economic growth rate and is not far behind most developed nations on addressing climate change concerns and setting carbon reduction targets. India has set ambitious goals to reduce its emissions intensity by 33-35% from 2005 levels by 2030 and to achieve 40% of its electricity generation from non-fossil fuel sources by then. These objectives are part of the country’s effort to achieve net zero greenhouse-gas-emissions by 2070.

While these targets are impressive, achieving them will require a massive shift in the way the country produces and consumes energy. Home to numerous legacy industries that are significant contributors to emissions, such as coal, oil and gas, and steel, India’s carbon footprint is large and will continue to grow as the economy expands. These sectors play an integral role in the Indian economy, providing employment to millions and factoring significantly in the country’s GDP. The key challenge often faced by such growing countries is how to manage trade-offs between profitability and sustainability.

One nascent solution in this scenario, providing a pathway to net-zero for carbon-intensive industries, is to shift towards more responsible operating models with ‘transition finance.’ These transition deals can complement green financing. Together, they represent the twin engines of a journey to net zero, with clean energy solutions rapidly deployed while reducing the emission intensity of legacy activities.

For a country like India, transition finance can play a pivotal role. Organizations are increasingly mandated to provide clear and consistent sustainability reports to regulators, investors and the wider community. Transition finance is the much-needed mechanism for these industries to invest in cleaner technologies, localize supply chains, and phase down (to eventually phase out) ‘brown’ materials, reducing carbon emissions and the environmental impact. It enables businesses to be more agile as they can tap into an ecosystem of best practices and fit-for-purpose solutions to measure and manage their transition pathways, along with the financing required for execution.

Contrary to the notion that profitability and sustainability are conflicting objectives, global success stories have demonstrated their inherent synergy. By embracing sustainable practices, businesses are unlocking new revenue streams to enhance operational efficiency and reduce their environmental footprint. This alignment allows nations to showcase their commitment to responsible business practices while reaping the rewards of economic growth.

Banks are instrumental in driving a country’s sustainable business transition, using a variety of financing structures, including blended finance. The path to net-zero also necessitates investments in research and development, as well as the actual implementation of sustainable technologies. The opportunities stemming from an increase in carbon-conscious models will allow nations to showcase their commitment to net zero goals without sacrificing growth. Eventually, this approach could also become a conduit for inclusive innovation, propelling countries like India towards a more balanced future of prosperity.

However, navigating the rocky road towards sustainable development for a country like India is not without its challenges. Issues exist such as gaps in data or sectoral targets for carbon reduction. While funding for new green projects is a big need, the transition to more responsible practices requires a holistic approach that goes beyond mere financial support. It calls for collaboration between governments, businesses and civil society to create enabling environments, develop robust regulatory frameworks and foster knowledge sharing and capacity building. Moreover, developing countries like India still need to enhance awareness and educate stakeholders about the long-term benefits of sustainability and the dangers of inaction.

India’s sustainable transition is already underway, benefiting not just the country, but creating a multiplier effect for regional growth. The country has overachieved its commitment made at the CoP-21 Paris Summit by ensuring that 40% of its installed power capacity is from non-fossil fuels almost a decade ahead of its deadline. The share of solar and wind in India’s energy mix has also grown phenomenally. Transition finance will have an important role to play in this commendable growth story, and the country’s progress makes us extremely hopeful.

Demand for sustainable financing and advisory services is already significant and will continue to increase in the coming years. An emerging power like India, which holds the G20 presidency in 2023, has an opportunity to advance its transition finance agenda and facilitate the flow of capital to businesses that want to stay ahead of the curve.

The key to striking an appropriate developmental balance for a country like India involves meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Author - Yulanda Chung - Managing Director, Head of Sustainability, Institutional Banking Group, DBS Bank

As published in Mint