Climate Finance For Coal States: A Roadmap

As India strides towards ambitious climate goals, the critical element underpinning this journey is climate finance. The International Energy Agency estimates that $160 billion per year is required between now and 2030 to keep India on the path to net-zero by 2070.

Right now, India is barely attracting one-third of this amount yearly. Yet, this $160 billion per year only accounts for mitigation finance i.e. for deploying renewables and other green technologies. There are various other needs.

Climate finance for India in reality is about bringing money to the states. While the federal governments set the national targets and create broad policies, it’s the states that are responsible for implementation of climate policies. While every state requires mitigation and adaptation finance, the coal dependent states such as Chhattisgarh and Jharkhand need additional just transition funds. Today, millions of workers and several districts in these states are deeply dependent on coal for local jobs and revenues. Yet, ensuring just transition for coal communities involves developing and implementing economic diversification plans and reskilling of workers. All of which would require finance to flow to these states.

To meet the colossal demand for funds, states need a diversified and comprehensive approach. Here are six ways coal-rich states can drive investments for just energy transition.

1. Green bonds –Green bonds are fixed income asset-backed securities. They provide investors with regular interest payments and the return of the principal at a future maturity date. These bonds are typically backed by the issuer’s promise to pay, which is often secured by a specific set of assets or revenue streams. The assurance for repayment can come from the government’s budgetary allocations or from Development Finance Institutions (DFIs) with mandated support for environmental projects. 

The market for green bonds are expanding rapidly. They present a tangible opportunity for large investors to contribute to climate-related projects, and yet receive a financial return. According to credit ratings agency S&P Global, the market for green bonds is set to rise by 400% in the current fiscal to over $1 trillion from $270 billion in 2020. The global and Indian investors find these lucrative as they enjoy tax exemptions on interest earned under the Federal government’s IT Act. Coal rich states like Chhattisgarh and Jharkhand can capitalize on this financial instrument by issuing green bonds themselves. Proceeds from these bonds can then be used towards initiatives that decarbonize energy-intensive industries. Additionally, these funds can be utilized to provide compensation and retraining programs for coal workers, supporting them through the economic transformation. 

2. Municipal bonds - These bonds are colloquially referred to as ‘munis’. They are a financial tool akin to green bonds with the distinct feature of being issued predominantly by local government entities. These bonds can be pledged by a municipality within coal-dependent districts such as Ramgarh or Korba in Jharkhand and Chhattisgarh to repay the borrowed capital to bondholders along with promised interest rate until bond reaches maturity. While it shares similarities with green bonds, including tax-exemption on interest, municipal bonds typically offer more modest returns making them more attractive. 

The municipal bonds serve as a pragmatic investment vehicle - it provides portfolio diversification benefits due to their low correlation with other investment classes such as equities and commodities. This characteristic makes municipal bonds particularly valuable for mitigating portfolio risk, as they demonstrate resilience against inflation, and fluctuating interest rates due to central banking policies. A good example of leveraging municipal bonds for sustainable development is observed in Naya Raipur, Chhattisgarh’s pioneering smart-city. The city seeks to secure INR 200 crore through the issuance of green municipal bonds within the fiscal years of 2023-24. Replicating Naya Raipur’s model in other coal-dependent regions could present a dual opportunity. First, it will help attract investment into new sectors for economic diversification. Second, it will help facilitate retraining programs for workforce transition into new sectors. 

3. Pension funds - These are also known as superannuation funds. They are significant pools of savings amassed over an individual's working life. Traditionally conservative in their investment strategies, they have historically focused mainly on government securities, investment-grade bonds and equities. However, to achieve higher returns, these funds have begun diversifying into mutual funds, and debt securities issued by companies, and public financial institutions.

These pension funds find favor with the investors due to a nice fit between the long-term maturity of greening the economy and pension fund portfolio. There are growing examples of large pension funds investing in just transition. From the Caisse de dépôt et placement du Québec, California Public Employees’ Retirement System to the Norwegian Government Pension Fund Global are actively supporting a just transition to a green economy.

Domestic pension funds like Employees' Provident Fund Organisation and SBI pension funds have had a lukewarm response on just transition. States like Chhattisgarh can tap into the potential of pension funds investments in climate related projects by creating long term bankable climate projects that assure steady cash flow for pension funds.

4. Private Equity/Venture Capital (PE/VC) funds - Known for their propensity to engage with high-risk, high-reward ventures, PE and VC funds are increasingly becoming vital instruments for financing energy transition. In coal dependent regions, establishing a dedicated VC Fund through a state nodal agency could be a strategic move. This would allow aggregation of diverse financing sources, including PE/VC Funds to accelerate the just energy transition. Such a fund could specialize in climate related ventures, channeling projects that promise just transition-related social impact. 

The state of Chhattisgarh had in 2016 mulled the idea of setting up a nodal agency under the state’s Innovation and Entrepreneurship Development Policy. This could be revived for just energy transition. Revitalizing this idea, the new agency could serve as a cornerstone to supporting climate focused projects. By doing so, the state would be able to align its economic development needs with climate leadership. Using PE/VC Funds as a springboard for impactful climate and economic diversification projects, this forward-thinking approach would place states like Chhattisgarh at the forefront of just energy transition. 

5. Environment Social and Governance (ESG) investing - ESG is an umbrella term that describes three key areas of importance when measuring the sustainable and ethical dimensions of a business. The ‘E’ qualifies the environmental performance of the business, ‘S’ is the social performance, and ‘G’ is the integrity and transparency of its management and board of directors. At the COP26 summit in Glasgow, over 450 corporations, controlling assets upwards of $130 trillion, committed to a net-zero carbon future by embracing ESG principles. These commitments have helped earmark a substantial pool of global capital towards energy transition. This marked a shift in investor priorities towards projects aligned with the broader goals of sustainability. The financial institutions are now offering ESG-specific loans. This shift is expanding the spectrum of investment opportunities available to developers of green initiatives.

In India, entities such as the State Bank of India, or mutual funds like Axis ESG Fund, Quantum ESG have become signatories to the UN Principles of Responsible Investment. Chhattisgarh’s stride in ESG is evident in the recognition of the state’s Minor Forest Produce Cooperative Federation, which garnered the prestigious Prithvi Award in the Government Category for its ESG-centric contributions in 2023. This kind of leadership can also be extended to other areas and in other coal dependent states as well.

6. Traditional Financing Institutions - Domestic financial institutions like the Small Industries Development Bank of India and the Industrial Development Bank of India can enhance investments through mechanisms like first loss guarantees. In essence, they will cover a portion of investor losses. Moreover, insurance companies can also provide similar guarantees. Internationally, multilateral development institutions like the International Finance Corporation, a part of the World Bank Group, play a crucial role in funding climate change initiatives. These institutions operate under strict safeguard policies and compliance mechanisms to ensure responsible investment decisions. Coal dependent states should set up a finance taskforce to come up with an integrated approach to leverage both domestic and international entities driving climate change and just transition programs. 

Coal dependent states would require an “all the above approach” for availing large scale finance to achieve their climate and just transition needs. The path ahead is complex, but with a coordinated, multifaceted financing strategy, the time for action is now.  

(The article is written by Sandeep Pai, Director, Swaniti Initiative & Himanshu Damle, a Fellow at Swaniti Initiative.)

(The opinions presented belong solely to the authors.)