Expert Speak Terra Nova
Published on Nov 11, 2021
Public-private cooperation is the first step towards securing financial investments and adopting new technologies for our green future.
Financing the green transition

This piece is part of the essay series, Shaping our green future: Pathways and Policies for a Net-Zero Transformation.


The world is seeing a spate of extreme weather events that are causing ecological and humanitarian disasters, underscoring the magnitude of challenges facing humanity brought about by climate change. The international community is hard-pressed at finding solutions, and the primary challenge to green transition is green financing. This article outlines the current global green financing landscape, the role of the State and the market in sourcing the required investments, and the design of the right instruments and institutions to make the transition a commercial and social success. 

Current Green Financing Landscape

In an act of significant foresight at Cancun, Mexico in 2009, developed countries promised to provide US $100 billion a year of climate finance to the developing world. The commitments read thus: “The financial, technology and capacity-building support agreed in Cancun applies to both mitigation and adaptation actions by developing countries…In the broad context of long-term financial support, industrialised countries committed to provide funds rising to US $100 billion per year by 2020 to support concrete mitigation actions by developing countries that are implemented in a transparent way. These funds would be raised from a mix of public and private sources.”

The operative word is “provide”. Many developing nations expected this to mean that it was a commitment by the industrialised countries to transfer funds to them. It was expected that a significant part of the US $100 billion a year could flow to funds like the Green Climate Fund (GCF), which can then finance mitigation and adaptation strategies in the developing world.

However, the Global North has had a different interpretation of the word “provide”. For instance, some have argued that only public finance should count towards the US $100 billion, while others point out that only grants should be considered. India’s Ministry of Finance shares this viewpoint. In a statement from the Organisation for Economic Co-operation and Development (OECD) released in September 2021, the numbers were reported as thus: climate finance provided and mobilised by developed countries for developing countries totaled US $79.6 billion in 2019, up by 2 percent from US $78.3 billion in 2018. The increase was driven by a rise in public climate finance, while private and bilateral climate finance dropped.

It was expected that a significant part of the US $100 billion a year could flow to funds like the Green Climate Fund (GCF), which can then finance mitigation and adaptation strategies in the developing world.

An OECD report suggests that most of the transfer is in the form of loans. In terms of the financial instruments that underpin public climate finance provided by developed countries (both bilaterally and via multilateral institutions), loans more than doubled from US $19.8 billion in 2013 to US $44.5 billion in 2019. Grants, meanwhile, fluctuated around US $10 billion per year in 2013-15 and around US $16.7 billion in 2016–19. The share of loans and grants were 71 percent and 27 percent, respectively, of total public climate finance provided in 2019. Equity investments increased from US $0.7 billion in 2013 to US $1.7 billion in 2019, accounting for only around 2 percent.

With heightened political will on climate change, the nature of the transfers from the developed world to the Global South should change along two critical dimensions: (a) lower cost funds or grants; and (b) transfer of technology at low cost which makes mitigation and adaptation easier. 

Policies, Tech, and Social Support for Green Investments

Investments in the green transition will be driven by three forces: (1) government policies; (2) technological viability; and (3) social acceptance.

Governments will play a vital role in setting national climate policies, creating internal markets (or taxes) for carbon, and reaching global agreements on carbon tariffs. India, for one, has made its position about “climate equity” clear in various forums. Given the country’s low per-capita incomes and carbon emissions, India seeks to achieve a balance between its economic growth commitments to its citizens and its climate responsibility towards the global community. India has been imposing heavy taxes on fossil fuels and is encouraging deployment of renewable energy. As large economic blocs begin to discover their own carbon prices (e.g., EU and China have taken the lead), these could feed into global discussions on carbon tariffs—countries will have to tread cautiously so as not to make this a trade barrier in the form of a carbon border tax.

Green technologies like renewable energy are increasingly becoming more economically viable.  Ideas and technologies in other fields are at various stages of development and end-user acceptance, including plant-based meats, battery walls, offshore wind, and green hydrogen: these ideas need nurturing to prove their commercial viability.

Even as political leaders have become more aware of the green imperative, the transition will neither be quick nor painless. Many non-green assets have long economic lives (e.g. coal power plants) and with many jobs associated with them (e.g. the entire service value chain of internal combustion engine or ICE vehicles). Transition challenges like the one caused by a sudden shortfall in intermittent power supply from the North Sea in September, October 2021 from offshore wind projects led to spiraling prices across the energy value chain. Such challenges need to be addressed via significant investments in forecasting, grid balancing, demand moderation, and policy support for the vulnerable if power is in short supply. Skilling into new technologies will require societal and personal investments. This means that the transition to a new green world will require significant handholding by policymakers to make it a “just transition”.

Given the country’s low per-capita incomes and carbon emissions, India seeks to achieve a balance between its economic growth commitments to its citizens and its climate responsibility towards the global community.

Bringing the State and Market together

Renewable power, even without carbon taxes on fossil fuels, is now cheaper than coal-fired power. Converting to renewable sources, whether at a utility scale in the case of solar farms, or at a retail level of rooftop solar, has become more economically viable for end-users while still leaving a reasonable return on capital for the investors. Electric vehicles, for example—with battery prices falling and charging infrastructure increasing—are poised to breach the total cost of ownership (TCO) for consumers compared to ICE vehicles. Plant-based protein sources are now cost-competitive, thereby reducing the need to keep large animal herds that generate massive methane emissions. As these technologies mature, their deployment will be driven by commercial investors seeking appropriate returns. Simultaneously, the government’s role in these industries will largely be to unleash market forces and remove the bottlenecks that impede growth.

Other green technologies are at promising stages of development and user acceptance, including offshore wind, battery storage, green hydrogen, and carbon capture. These new ideas and technologies may be more expensive to deploy commercially or carry greater and unknown risks in some geographies. If they eventually become commercially viable, these instruments could make a material difference in facilitating decarbonisation.

At the same time, leaving costly and risky technologies only to market forces may not work relative to the required decarbonisation targets: governments, multilateral institutions, and climate investment funds will have to work in tandem with markets to lower costs and jumpstart industries. In cases where an idea has the potential (but can be risky) or the cost of deployment is high (costly), executing a pilot demonstration project can create learnings for private enterprises and bring valuable policy lessons for regulators and policymakers.

Governments have a wide range of policy levers to jumpstart green industries. They can do the following: (a) absorb the initial capital expenditure of the pilot project; (b) offer subsidies for part of the capital or operating costs; (c) mandate or incentivise offtake of final product; (d) help push for and create technology transfer initiatives between countries; and (e) offer connecting infrastructure or distribution for the new technology. Private enterprise, on the other hand, may be willing to experiment with demonstration projects on the expectation of a much larger prize, if the technology is commercially validated.

For this to work, different sets of capital providers need to come together to complement the role played by the government and the market. Public capital needs to come from: (a) global multilateral contributions like the Green Climate Fund; (b) bilateral funds between two (or small group of) countries; (c) current multilateral developmental institutions moving their focus to green investment; and (d) national and local government budgets. In 2019, public climate finance from developed countries reached US $62.9 billion. Private capital will come from: (a) private equity and venture capital funds; (b) philanthropic capital; and (c) firms with non-green cash flows now channelising investments into green ones. In 2019, private climate finance mobilised from developing countries was recorded at US $14 billion.

These new ideas and technologies may be more expensive to deploy commercially or carry greater and unknown risks in some geographies.

Instruments for sharing risks and returns

Capital providers need to create appropriate instruments to: (a) pool capital from those who owe the world a climate debt; (b) transfer it transparently to countries and societies that need capital support in deploying new technologies for a just transition; (c) take risk on emerging technologies—some of which may not succeed; and (d) be patient for a longer period as transitions play themselves out. For the above-mentioned scenarios, financiers can consider the following options:

  • First-loss capital: Funds willing to take first loss can crowd-in significant amount of other risk-taking capital. A pool of funds in which, say 10 percent of the capital is designated as “first loss” means that the remaining 90 percent of fund contributors can be offered a better risk-return trade-off. Alternatively, payout to such capital takes place only when impact outcomes are met.
  • Guarantees: This is a force-multiplier instrument. Unlike first-loss capital which requires actual deployment of funds, guarantees are a way to backstop such payouts, as and when the need arises. If run by credible counterparties like the multilateral development institutions, this can reduce the need to deploy upfront capital. As and when guarantees are needed to absorb any losses from the investment, such guarantees can be honored.
  • Forever funds: One aspect that constrains investing today is the finite time (ranging from seven to 15 years) for private or government funds. Eventually, funds and their returns must be returned to contributors. Funds which commit to reinvest all (or most of) the proceeds back in furthering green transition can offer a much longer time duration for projects to mature. Specific interventions may vary over the life of the funds, however, that they do not need to be returned can allow such funds to take a longer view of the transition process.

The intermeshing of sources of capital and specific instruments can create a wide range of tools for financing the transition.

Case Study: Green Growth Equity Fund

India is expected to achieve its target of reducing 33-35 percent emissions intensity of its 2005 GDP well before the year 2030. This is an actionable target stemming from India’s COP 21 Paris 2015 commitment, which is leading to a lower carbon development pathway for India. The International Energy Association (IEA) forecasts that India requires US $1.4 trillion in investments over the next two decades in green energy technologies alone. To put this in context, India’s GDP in FY2021 is US $2.7 trillion. These green investments are therefore expected to constitute a significant proportion of India’s investments over the next few years.

In April 2018, National Investment and Infrastructure Fund’s (NIIF) Fund of Funds, along with the UK’s Foreign, Commonwealth and Development Office (FCDO) came together to envision a fund that would invest in green infrastructure in India on commercial terms. The purpose of the fund was to provide impetus across sectors such as renewables energy, energy transmission, clean transportation, water treatment, waste management and other emerging businesses in the clean energy/environment space, such as energy storage/fuel cells.

The Fund, named Green Growth Equity Fund (GGEF), was anchored with commitments of US $170 million each from NIIF and FCDO and was operationalised as India’s first climate fund in 2018. From just a plan, the Fund has now invested in five platform investments across renewable energy (utility scale as well as ‘commercial and industrial’), waste management, electric vehicles, water, and wastewater management.

The current fund size is US $410 million. Additionally, new commitments worth US $200-300 million are expected from private and multilateral investments including premier global climate focused investors, making GGEF the world’s largest single-country focused climate fund in emerging markets. Over the next decade, the businesses supported by GGEF are expected to scale and make greater impact on climate action in India. The success of GGEF demonstrates credible business opportunity that is present in enabling the green economy and mitigation of climate change, in a commercially sustainable manner.

The Fund, named Green Growth Equity Fund (GGEF), was anchored with commitments of US $170 million each from NIIF and FCDO and was operationalised as India’s first climate fund in 2018.

Creating the Right Institutions

The players driving the green transformation—governments, private enterprises, and financiers—need the right institutions to accelerate the market viability of new technologies. Such institutions include specialised venture capital and private equity funds, development finance institutions, and payment guaranty entities (such as the Solar Energy Corporation of India). Defining the decarbonisation impact of new technologies will be crucial for these institutions.

Regulators will need to set specific criteria and transparency standards that should be followed by financial institutions to allow them to label the financial instruments under each of these categories. This requires creation of well-defined metrics to help stakeholders assess the quality of intervention (and avoid greenwashing).

The topic of green finance has seen consistent commitment at global forums with ambitious targets. It is now time for a commensurate translation to action. Attracting financing for developing countries at scale will require unprecedented flows. It is public and private cooperation that will power the green transition to become a green revolution. 

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Akhilesh Tilotia

Akhilesh Tilotia

Akhilesh Tilotia is currently Principal Strategic Initiatives and Policy Advisory at NIIFs Mumbai office. In this role Akhilesh is responsible for building research and a ...

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Anya Bharadwaj

Anya Bharadwaj

Anya is a Research Analyst at NIIF. She works with the Strategy and Policy team and her role involves policy support and investment origination across ...

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