Editorial 1: Grey to Green: Financing the green transition
Context:
- The National Bank for Financing Infrastructure and Development (NaBFID) lifts burden of implementing the National Monetisation Pipeline (NMP) and financing projects in the National Infrastructure Pipeline (NIP)
- To finance India’s infrastructure needs, NaBFID has disbursed 60 per cent of the Rs 25,000 crore loans that it has sanctioned.
- The bank has recently declared its intent to introduce takeout financing products, invest in Infrastructure Investment Trusts (InVITs) and refinance loans.
Integration of Climate change and the National Infrastructure Pipeline
- Integration of climate risk in NIP is largely limited to building for acute physical risks, such as disasters and extreme events.
- Building resilience against chronic physical risks like rising temperatures or accelerated loss of biodiversity finds space in the broad policy recommendations and inclusive climate infrastructure development.
- Contrary to the global trend in the adoption of nature-based solutions and embracing green and blue infrastructure, NIP continues to focus on traditional grey infrastructure.
- For instance, it champions the improvement of stormwater drainage infrastructure and eschews integrating green infrastructure like green roofs that global cities are adopting for flood mitigation
G7 Effort for promoting finance for climate based infrastructure:
- G7 has supported mandating disclosures under the task force on climate-related financial disclosures for banks and companies.
- Extending business responsibility and sustainability reporting (BRSR) to the top 1,000 listed companies is an encouraging move to support climate-based infrastructure.
- However, efforts to mainstream sustainability and climate resiliency remain, by and large, a matter of rhetoric, and the subject of a few declarations.
- Operationalising these concepts and mainstreaming their implementation is a time-consuming effort and the lack of expertise makes the task complicated. Therefore, ensuring the flow of funds to sustainable projects can prove difficult.
India’s effort for climate-based infrastructure:
- Indian regulators have announced a framework for green/blue bonds, and green deposits. They also intend to propose guidelines for climate stress testing.
- Identifying relevant climate risks, correlating them to financial risks and quantifying them is a complex process. Therefore, credit risks have also to be accounted for.
- As a result, addressing climate-related financial and infrastructure challenges requires NaBFID to focus on structural measures that improve asset provisioning and quality as well as produce returns on investment.
Role of Private sector in climate-based infrastructure development:
- Engaging private finance in infrastructure projects through public-private partnerships (PPPs) often leads to cost overruns and delays. India’s experience with PPPs has been a mixed bag.
- NaBFID is well-placed to consider recommendations on investing in pre-planning and site investigation, adopting a collaborative planning process with departments and downstream contractors involved to enable the success of PPPs.
- Moreover, plans to proceed on the takeout financing route need an assessment of how broad-based growth and demand for credit would be.
Way forward:
- NaBFID needs to take advantage of innovative financial products that have proliferated in a bid to mainstream climate adaptation and mitigation.
- Green bonds, sustainability-linked bonds, and transition bonds all seek to divert global financial flows towards projects aimed at climate mitigation and resilience. General purpose and use-of-proceeds bonds can be powerful instruments to generate funds.
- On the back of the success of India’s sovereign green bond, issuances by NaBFID for private placements could increase green capital flows to infrastructure. This could be in line with its objective of indirect lending and attracting investments from the private sector.
Conclusion:
- Employing entity-level and project-level safeguards to direct funds to appropriate projects, through innovative financing structures, would attract a diverse investor base and enable scaling of finance.
- Most transition bond frameworks, for instance, recommend an entity-level transition plan. Employing disclosure standards like those framed by global agencies such as the Task Force on Climate Related Financial Disclosures would be useful to enhance transparency, credibility and avoid potential hazards of greenwashing.
Editorial 2: Indian Ocean Dipole: What is it, how it can limit El Nino effects
Recent Context:
- With the El Nino phenomenon almost certain to affect the Indian monsoon this year, high hopes are pinned on the development of a positive Indian Ocean Dipole (IOD) and its ability to counterbalance the El Nino effect.
- The IOD is an ocean-atmosphere interaction very similar to the El Nino fluctuations in the Pacific Ocean, and has positive impact on Indian monsoon in the Indian Ocean. It is also a much weaker system than El Nino, and thus has relatively limited impacts.
- However, a positive IOD does have the potential to offset the impacts of El Nino to a small measure in neighbouring areas
Current position of Indian ocean dipole:
- While the El Nino is already firmly established in the Pacific Ocean this year, the IOD is still in the neutral phase.
- “The Indian Ocean Dipole is currently neutral. All international climate models surveyed by the Bureau suggest a positive IOD event may develop in the coming months
- The India Meteorological Department (IMD), in its bulletin earlier this month, said there was an 80% chance of a positive IOD in the coming months. “The probability forecast for IOD indicates about 80% probability for positive IOD conditions and 15% of a neutral IOD during June-August 2023 season,
The Indian Nino
- In a normal year, the eastern side of the Pacific Ocean, near the northwestern coast of South America, is cooler than the western side near the islands of Philippines and Indonesia.
- This happens because the prevailing wind systems that move from east to west sweep the warmer surface waters towards the Indonesian coast. The relatively cooler waters from below come up to replace the displaced water.
- An El Nino event is the result of a weakening of wind systems that leads to lesser displacement of warmer waters. This results in the eastern side of the Pacific becoming warmer than usual. During La Nina, the opposite happens
- Both these conditions, together called El Nino Southern Oscillation or ENSO, affect weather events across the world. Over India, the El Nino has the impact of suppressing monsoon rainfall.
- IOD, sometimes referred to as the Indian Nino, is a similar phenomenon, playing out in the relatively smaller area of the Indian Ocean between the Indonesian and Malaysian coastline in the east and the African coastline near Somalia in the west. One side of the ocean, along the equator, gets warmer than the other.
- IOD is said to be positive when the western side of the Indian Ocean, near the Somalia coast, becomes warmer than the eastern Indian Ocean. It is negative when the western Indian Ocean is cooler.
ENSO and IOD
- The air circulation in the Indian Ocean basin moves from west to east, that is from the African coast towards the Indonesian islands, near the surface, and in the opposite direction at the upper levels.
- That means the surface waters in the Indian Ocean get pushed from west to east. In a normal year, warmer waters in the western Pacific near Indonesia cross over into the Indian Ocean and make that part of the Indian Ocean slightly warmer. That causes the air to rise and helps the prevailing air circulation.
- In the years when the air circulation becomes stronger, more warm surface waters from the African coast are pushed towards the Indonesian islands, making that region warmer than usual. This caused more hot air to rise and the cycle reinforces itself. This is the state of negative IOD.
- The opposite case involves air circulation becoming slightly weaker than normal. In some rare cases, the air circulation even reverses direction. The consequence is that the African coast becomes warmer while the Indonesian coastline gets cooler.
- A positive IOD event is often seen developing at times of an El Nino, while a negative IOD is sometimes associated with La Nina. During El Nino, the Pacific side of Indonesia is cooler than normal because of which the Indian Ocean side also gets cooler. That helps the development of a positive IOD. Many studies suggest that IOD events are actually induced by ENSO
Impact of Indian ocean dipole:
- A positive IOD helps rainfall along the African coastline and also over the Indian sub-continent while suppressing rainfall over Indonesia, southeast Asia and Australia. The impacts are opposite during a negative IOD event.
- Compared to ENSO events, the impacts of IODs are much weaker. But hope lingers, including this year when a strong El Nino is expected to develop in the Pacific Ocean.
Conclusion:
- The year 2019 was a case where the IOD event developed during late monsoon, but was so strong that it compensated for the deficit rainfall during the first month of the monsoon season (June had 30% deficiency that year).
- The deficit in June that year was also attributed to a developing El Nino but that fizzled out later. The similar incident can also be observed this year.