Scaling Adaptation Finance in India

The decade ending 2019 is set to become the hottest on records, as per the World Meteorological Organization (WMO). The hike in global temperatures has led to a surge in natural disasters such as floods, cyclones, droughts, wildfires and heatwaves. These events have already forced a record 70 lakh people across the world to abandon their homes (between January and June 2019), and an additional 2.2 crore people are expected to be displaced by the end of 2019. There is a significant impact of these extreme weather events on the global economy and G20 countries, for instance, have experienced an average annual economic loss of USD 142 billion during 1998-2017. Agrarian economies like India, suffer the most due to global warming, on account of long coastline of 7500 km, vast expanse of low-lying areas, high population density, poor infrastructure and continued reliance on agriculture for livelihoods. India, in fact, is amongst the top 5 countries within the G20 in terms of economic loss and the economy is expected to shrink by 10% by the end of century, if it fails to address climate change.

Given that it is extremely critical to climate-proof Indian economy, financial institutions have to play a key role in scaling adaptation finance and integrating climate risk within core strategy to withstand these climate shocks. At one level, this entails mitigating physical risks by de-risking portfolio investments. At another level, it’s about tapping the USD 1.7 trillion investment opportunity across sectors like green buildings, sustainable agriculture, climate-smart urban water management, which yield adaptation benefits. To be able to do so effectively, physical risks need to be well understood, assessed, managed and disclosed. This, in turn, requires quantification of climate-related risks and opportunities, recalibration of risk management strategies, alignment of financing portfolio and its impact assessment. The recently concluded UNEP FI Regional Roundtable Europe witnessed policymakers, financial sector, market regulators and researchers, coming together to deliberate upon solutions and enablers to drive sustainable finance in Europe and across the world, with a focus on climate adaptation.

In order to assess, quantify and integrate climate risk considerations in risk management framework, financial institutions need to look at adopting scenario analysis and stress testing approaches. Initiatives such as Climate Resilience Risks and Opportunities Coalition, are playing a key role in enhancing the capacities of FIs to assess and disclose the impact of physical risks. Further, adoption and implementation of frameworks such as Task Force on Climate-related Financial Disclosures, assist organisations in institutionalizing systems for managing climate-related risks at strategic, operational and project level. As far as innovative financial structures are concerned, green bonds, social bonds, resilience bonds, catastrophe bonds and blended finance could be leveraged to mobilize adaptation finance towards sectors such as water, affordable housing and sustainable agriculture. This combination of innovative financial structures, robust practices and accountability frameworks, will play an instrumental role in scaling adaptation and resilience efforts in India.

Namita Vikas