Climate finance is a critical lever for addressing climate change needs. But to address this crisis, we need to invest in multiple, interconnected connected sectors across energy, agriculture and mobility. Many of these today struggle for access to finance.
Manoj Kumar,Social Alpha, highlights the need for the climate finance sector to take a mission-driven approach to the climate crisis, akin to the approach taken to address AIDS, "Pick three-four big problem areas and go after it in mission mode and put lots of capital behind solving these problems". "This lack of capital support can lead to larger economic and social consequences".
A report by McKinsey estimates that between 2.5 percent and 4.5 percent of India’s annual GDP could be at-risk by 2030 due to climate change.
Meanwhile, the funder ecosystem is still nascent and risk appetite is low. Creative and collaborative climate finance are urgently needed to address the current funding gaps.
There are two perspectives to this story: what funders and founders need from each other. Often, these are at cross-purposes. Both sides need to understand the counter viewpoints to find workable solutions for financing.
The ask from funders:
Today, the funder mix for climate finance varies from philanthropic capital providers to institutional investors, family offices and multilateral donors. Today they largely work independently. The immediate need is for multiple capital allocators from different contexts to work collaboratively, and solve different capital needs at different points of time for different innovations.
Karthik Chandrasekar from Sangam Ventures, shares a guidance for funders, "Investors need to partner closely with entrepreneurs to learn and understand the how-tos and understand the pathways in order to invest better".
Balawant Joshi, IDAM Infrastructure, suggests a way to incentivise funding for banks. "There is a need for carbon offsets/carbon financing solutions to underwrite the new risk models for banks. Currently, they ask for a high level of collateral even for a 25 lakh loan which is obviously not viable for MSMEs".
Beyond the private sector, philanthropic capital has played a key role in the sector. Gautam John and Natasha Joshi, Rohini Nilekani Philanthropies consider philanthropy as risk money to hold governments and markets accountable for their responsibility to the community and believe that investment should enable and catalyse the ecosystem at large.
But for most mainstream investors, ultimately to really unlock creative and collaborative capital, climate has to mean business.
"Entrepreneurs need to have a business case and solve real problems and become viable. They need to make business sense and not just operate with passion and a desire to change the world" shares Ananth Aravamudan, Villgro. "To increase adoption, make sure you have a strong economic value proposition as well as a user-friendly product/solution", adds Mark Kahn, Omnivore.
The ask from founders and ecosystem partners
On the other side of the equation, Abhilasha Purwar, Blue Sky Analytics, shares, "Peanuts are thrown at climate change solutions by investors and donors and yet a lot of impact is expected. The climate crisis is unprecedented and unpredictable; investors need to be ready for this. It cannot take this long to raise money for entrepreneurs in this space".
Mala Subramaniam, Arghyam has a clear vision for philanthropists who are investing in climate action: "Move money from paying for activities and projects to paying for outcomes." Adding to which, Ashwin Mahesh, Mapunity argues: "There is a need for more philanthropy to come in to support ecosystem efforts as there is no money in ecosystem work; only institutions get funded". On the same note, Harish Hande, SELCO emphasises the need for ‘failure money’ to encourage youth innovators and risk takers who may not meet stringent funder checklists.
Manu Gupta, SEEDS, meanwhile highlights the complete absence of preemptive funding for out-sized losses caused by climate-triggered disasters. Climate financing solutions should trace loss of property, assets and lives and ascribe a monetary value to this loss, taking into account not just the present, but also the anticipated future trajectory of climate change events.
Dr Ashok Khosla, Development Alternatives, calls out the need for funding to flow to the small and medium businesses who can unlock change. He adds, "Financing systems need to be able to accommodate small/local/decentralised needs and provide community-based businesses with access to finance. Financing for MSMEs, appropriately subsidised with carbon credits, will start a forest fire of planet-friendly enterprises".
Metrics for measurement
One way to address the gap is to build objective measurement systems. Veena Sreenivasan, ATREE articulates one key reason for the funding challenge. "Unlocking financing for nature-based solutions is a challenge because the evidence is mixed and therefore not financeable". Meanwhile, Kitayun Rustom, CERE, calls for a more fundamental paradigm shift at the level of economic policy—that GDP be measured to take into account growth as well as the cost of resource depletion.
Measurement metrics are also key to track the outcomes. Shiv Kumar, Catalyst Group, argues the need for universal metric and accounting systems sharing the example of a carbonated drink. "This can sell for INR 10/- without the true costs being made transparent—from water damage, public health, plastic waste, fossil fuel-based transport, and manufacturing".
What next from here
Many capital allocators today struggle with how abstract ‘solving climate change’ can appear. With a lack of universally understood positive climate impact metrics and yet-to-be understood connected pathways, creating standards and benchmarks are a struggle.
Even as public finance will continue to fund a large chunk of climate action and innovation, private funders—philanthropies, investors, family offices—have a crucial role to play in enabling capital to reach and support innovation. Allocators of resources, in failing to address climate change, are putting livelihoods and lives at risk.
In the near future, is it possible that all financing will in essence be toward positive climate action? The market structure around climate finance, which includes financial market participants, products, policies, regulations, and infrastructure, must grow at unprecedented scale and speed to meet the funding needs of a green economy.
Maria Clara Pinheiro is the Director, Ashoka, South Asia. Maya Chadrasekaran is the Co Founder and Managing Director of Green Artha, a climate venture fund and innovation firm. Vidushi Kamani is the Head of the Ecosystems Programme at Green Artha.