Blended Finance for Climate Investments in India Acknowledgements International Finance Corporation Copyrights and Citation IFC — a member of the World Bank Group — is the largest © 2023 International Finance Corporation / The World Bank global development institution focused on the private sector Group. 2121 Pennsylvania Avenue, N.W. Internet: www.ifc.org in emerging markets. We work in more than 100 countries, using our capital, expertise, and influence to create markets This work is a product of the staff of the International and opportunities in developing countries. In fiscal year 2023, Finance Corporation (IFC). The findings, interpretations, and IFC committed a record $43.7 billion to private companies and conclusions expressed in this work do not necessarily reflect financial institutions in developing countries, leveraging the the views of IFC, its Board of Executive Directors, or the power of the private sector to end extreme poverty and boost governments they represent. shared prosperity as economies grapple with the impacts of global compounding crises. For more information, visit IFC does not guarantee the accuracy, reliability or www.ifc.org. completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no Authors responsibility or liability for any omissions or errors (including, Roshika Singh, Senior Country Officer, India without limitation, typographical errors and technical Rajesh Miglani, Senior Climate Change Specialist errors) in the content whatsoever or for reliance thereon. The Pranab Ghosh, Principal Investment Officer boundaries, colors, denominations, and other information Erin Elizabeth Baldwin, Operations Officer shown on any map in this work do not imply any judgment on Priyanka Jetwani, Investment Officer the part of IFC concerning the legal status of any territory or Kamalika Das, Economist the endorsement or acceptance of such boundaries. Harsh Jhanjaria, Operations Officer   Anjali Garg, Energy Specialist The contents of this work are intended for general Veenu Singh, Country Analyst, India informational purposes only and are not intended to constitute Dharini Mathur, former Principal Counsel legal, securities, or investment advice, an opinion regarding the appropriateness of any investment, or a solicitation of any Leadership type. IFC or its affiliates may have an investment in, provide The team is grateful for the mentorship and inputs provided by: other advice or services to, or otherwise have a financial Hector Gomez Ang, former Regional Director, South Asia interest in, certain of the companies and parties (including Wendy Werner, Country Head, India named herein). Shalabh Tandon, Regional Head of Operations & Climate and Interim Regional Director, South Asia Please cite the work as follows: International Finance Corporation. 2023. Blended Finance for Climate Investments in Contacts India. The World Bank Group, Washington, DC. For more information, contact: IFC_India_Front_office@ifc.org Any queries on rights and licenses, including subsidiary rights, Contributors should be addressed to: World Bank Publications, The World The team is grateful for the input and contributions received Bank Group, 1818 H Street NW, Washington, DC 20433, USA; from: fax: 202-522- 2625; e-mail: pubrights@worldbank.org. Vivek Pathak, former Director, Climate Business Kruskaia Sierra-Escalante, former Senior Manager, Blended Cover photo: Adobe Stock Image Finance and Corporate Strategy Cover design: Clarity Global Strategic Communications Bhaskar J Kashyap, Indian Economic Service We would also like to thank the Department of Economic Affairs (DEA), Ministry of Finance, Government of India, which provided valuable inputs that shaped the contour of the report. i Contents Acknowledgements i Foreword 3 Preface 4 Message 5 Executive Summary 6 1. Background and Rationale 7 1.1 Climate change requires concerted action—India taking strong steps 7 1.2 India’s climate financing gap is substantial 8 1.3 Global climate financing trends 8 1.4 Need for private investments in climate transition 8 2. Introduction to Blended Concessional Finance 9 2.1 Enhanced principles for using concessional finance in private sector investment operations 9 2.1.1 Evaluating blended finance for climate 9 2.2 Transparency 11 2.3 Determinants of concessionality 11 3. Blended Finance Models—Approaches, Instruments, and Evaluation Methodologies 12 3.1 Blended finance instruments 12 4. Case Studies for Blended Concessional Finance 14 4.1 Sample IFC projects with blended finance support 14 4.1.1 Modern waste-to-energy plant 14 4.1.2 Affordable green housing 14 4.1.3 Working capital for makers of clean energy devices 14 4.1.4 Concentrated solar power 15 4.1.5 Improving access to electricity 15 4.1.6 Climate-smart agriculture 15 5. Sectors Requiring Blended Finance for Climate 16 5.1 Vulnerability assessment 16 5.2 Strategic sectors for mitigation and adaptation 16 6. Policy and Regulatory Environment 18 6.1 Key issues 19 6.1.1 Regulatory constraints associated with concessional capital for climate projects 20 6.1.2 Lack of standardized blended finance framework and associated knowledge gaps 20 6.1.3 Lack of sector analytics and measurement mechanisms 21 6.1.4 Formulation of a green taxonomy to scale up investments 21 6.1.5 Introduction of innovative instruments such as risk-sharing facilities 21 6.1.6 Need to align guarantee fee cap on partial credit guarantee mechanisms with risk profile 21 6.1.7 Clarity on withholding tax for providers of concessional finance 21 7. The Way Forward 22 7.1 Short-term interventions 22 7.2 Long-term interventions 22 References 24 Endnotes 25 List of Tables Table 1: Historical data on concessionality levels used in structuring blended transactions Table 2: Different product types in blended concessional finance Table 3: Possible climate investment areas Table 4: Concessionality instruments and list of indicative projects Table 5: Blended finance implementation road map in India List of Figures Figure 1: Climate Policy Initiative: Instruments used for climate investments Figure 2: DFI enhanced blended concessional finance principles for private sector projects Figure 3: Concessional commitment volumes for 2020 Figure 4: Sectoral GHG emissions data Figure 5: Key green finance milestones in India List of Acronyms CSP Concentrated Solar Power DAC Development Assistance Committee DFI Development Finance Institution GHG Greenhouse Gas GW Gigawatt IFC International Finance Corporation MW Megawatt MoF Ministry of Finance NDC Nationally Determined Contribution NGFS Network for Greening the Financial System OECD Organisation for Economic Co-operation and Development SDG Sustainable Development Goal SEBI Securities and Exchange Board of India UNFCCC United Nations Framework Convention on Climate Change 2 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Foreword S hifting to a low-carbon and sustainable economy has become an existential goal and we saw a number of countries, including India, making Our global experience in crowding-in private finance to deliver sustainable impact has underlined the catalytic significance of blended finance for private commitments towards mitigating climate change at sector projects. It is indeed one of the most significant the UN Climate Change Conference in Glasgow (COP26). tools that development finance institutions can use, India announced a set of ambitious emission reduction in cooperation with development partners, to address targets and announced a net-zero goal by 2070. There market failures and to help mobilize private investment is a need to access stable funding sources to meet in challenging environments to solve global issues these commitments and develop a broader and more such as climate change. IFC has been at the forefront mature sustainable finance ecosystem. Governments, in aiding our public and private sector partners in their regulators, multilateral institutions, private sector climate efforts to accelerate development impact. This companies, and investors have an important role to publication is an endeavor in the same direction. play as we embark on an unstoppable path to net-zero. Our aim, through this report, is to provide clarity on To set India squarely on the net-zero path, it is blended finance models to promote differentiated imperative to boost efforts to mobilize sustainable capital flows for climate mitigation, and share examples finance to build a green and resilient economy, and of projects across sectors, including energy, agriculture the financial sector has a key role to play in scaling up and housing, that can be replicated in the Indian context. climate finance. Per Government of India estimates, the At IFC, we are committed to applying the principles and country needs to scale up climate investments from $18 recommendations in this report to active investment billion per year to $170 billion per year to achieve its net- projects that unleash the potential of both private and zero targets. Considering limited financial resources public capital to achieve a low-carbon and inclusive in the developing world, a range of development development pathway for India’s people. partners, including the public sector, private sector, and development finance institutions, have decided to build on enhanced collaborative practices in formulating innovative instruments to de-risk vulnerable projects and facilitate adoption of green technology. Shalabh Tandon Wendy Werner Regional Head of Operations & Climate Country Head, India and Interim Regional Director, South Asia BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 3 Preface U nder the United Nations Framework Convention on Climate Change, countries around the world have pledged to reduce greenhouse gas emissions related investments. A requirement of this scale and magnitude can only be met if public, private, and philanthropic capital workstreams converge and work as part of their Intended Nationally Determined in synergy to unlock development gains associated Contributions. To bring these pledges to fruition, with climate action. scaling forms of green finance is paramount to ensure that capital flows, investment, and financial services I hope that this report will serve as a blueprint for are expanded to catalyze sustainable development. blended finance for climate opportunities in India. IFC is one of the world’s largest implementers of The use of blended finance instruments has recently blended finance, and we aim to advance the case for increased to scale up private finance for climate and blended finance as a powerful tool to catalyze private support the Sustainable Development Goals (SDGs). To investment for climate solutions in India. win the decarbonization battle, this catalytic capital will be critical to unlock trillions of dollars of private capital. Blended finance is not just about deploying concessional loans, but also de-risking private sector investments by leveraging instruments such as guarantees, first-loss, subordinated debt, outcome funding, and others. While blended finance can accelerate and catalyze markets, it will only be effective if there are appropriate regulations in place to incentivize low-carbon alternatives to accelerate a green market and technology adoption. It is estimated that every $1 of catalytic capital can leverage $8 worth of private capital, which otherwise would not have been deployed. Considering the enormous amount of capital required to tackle climate change and limited public resources, it is critical to innovate to de-risk vulnerable green projects. For India, mobilizing climate finance will be central to realizing its vision of directing the economy to a low-carbon production pathway. Estimates from India’s Intended Nationally Determined Contributions Jamie Fergusson suggest that the country will require approximately Global Director $170 billion per year until 2030 for its climate change- Climate Business 4 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Message C oal continues to be one of the most dominant sources of energy in the world—and a key driver of climate change, with impacts felt especially by the more complex technologies, new business models, new sectors, and more difficult economic conditions, examples of successful blended finance transactions in most vulnerable populations. A shift away from coal countries like India are critical for future private sector to an energy mix dominated by renewable energy is investment in climate projects. urgently needed: simply put, we must quit fossil fuels. The time is now to act on climate change and India can As one of the world’s largest emerging economies, seize this opportunity by advancing blended finance India is at a tipping point: there is still time to curtail and private sector solutions for the world’s greatest climate change and partnerships with and leadership challenge. from the private sector will be a critical factor in future success. With public resources under pressure from the compounding global crises, a strong private sector can fuel economic recovery and a healthy future. As the World Bank Group’s private sector arm, IFC is committed to accelerating sustainable private sector solutions for pushing the envelope of climate finance. Blended finance, or the blending of concessional funds from governments or philanthropic sources with funds from development finance institutions (DFIs) such as IFC, can crowd in private sector investment to pioneering, high impact development projects. By de-risking projects that the private sector would otherwise deem too risky, blended finance instruments, in combination with other tools such as advisory and technical assistance, can help create opportunities that would not otherwise exist. Since IFC began its blended finance practice two decades ago, the costs of renewable energy sources such as wind and solar have reduced considerably, and new, innovative sectors such as energy storage Aisha Elaine Williams and disruptive technologies present opportunities for Director the transition away from coal. As IFC’s focus shifts to Partnerships & Blended Finance BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 5 Executive Summary O ne of the biggest challenges facing emerging economies, including India, is to mobilize adequate monetary resources to achieve climate mitigation and Blended concessional finance has the potential to be a catalytic part of many solutions, helping overcome critical market barriers faced by the private sector. Blended adaptation targets. At COP26, India announced aggressive finance structures offer flexible approaches, financial targets to contribute to global decarbonization efforts. instruments, and evaluation methodologies to match the As per estimates in India’s long-term low emission market barrier being addressed. Briefly, these approaches development strategy, submitted to the United Nations include technical assistance that addresses the risks in Framework Convention on Climate Change (UNFCCC) new, uncertain, and fragmented markets for investors; in 2022, the country needs tens of billions of dollars by risk underwriting that reduces specific risks associated 2050 to ultimately achieve net zero by 2070. Also, based with a transaction; and market incentives that enable on updated NDCs, India’s adaptation finance requirements emerging sectors to achieve commercial viability. The stand at around $1 trillion by 2030. Public funding of associated instruments can take the form of senior loans, this magnitude could be difficult to allocate, especially subordinated loans, equity, performance-based incentives, because of the need to route limited public funds towards guarantees or risk-sharing, local currency denominated immediate social priorities and contingencies. A joint loans, and risk mitigation guarantees. report by IFC and the International Energy Agency recently called for the scaling up of private finance for clean energy There are several success stories of emerging markets in emerging and developing economies. The report makes deploying climate-based blended investments in climate- clear that investments need to more than triple from smart agriculture, blue economy, green housing, and solar $770 billion in 2022 to $2.2-2.8 trillion per year by the early energy, among others. In India, critical sectors for either 2030s to help Emerging Markets reach their energy and climate mitigation or adaptation have been identified climate goals. Around 60% of this will need to come from and climate-related blended finance investments will be the private sector. Accordingly, it is essential to crowd prioritized in these sectors. These identified sectors, which in private sector investment for India’s mitigation and include agriculture, land and water management, power, adaptation goals. To achieve this, India must establish an transport, infrastructure, health, industry, in addition investment ecosystem that provides bankable projects, to the circular economy, are in line with India’s net-zero fosters regulatory certainty, encourages financial sector ambitions while keeping the government’s short-, mid-, innovation, and undertakes extensive capacity building and long-term priorities in mind. for all stakeholders. A prerequisite for crowding in private sector investments, particularly in climate-related critical The blended finance market in India is nascent but sectors, is the de-risking of projects, including those with at an inflection point. The regulatory environment new-technology adoption risks and unproven commercial pertaining to finance has been maturing to keep pace viability. There are several innovative financing instruments with the changing needs of the global economy through that can unlock private sector climate-related investments. reforms and ease of doing business measures. Most This report will focus on one such instrument: blended recently, the Reserve Bank of India joined the Network concessional finance for climate, which has become a for Greening the Financial System (NGFS) in 2021, and powerful tool to mobilize private investments. in May 2022 the Securities and Exchange Board of India constituted an advisory committee for environmental-, Blended concessional finance, or blended finance, social-, and governance-related matters in the securities combines concessional finance from donors or third market. However, some regulatory challenges remain in parties alongside development finance institutions’ the blended finance ecosystem. There are reforms that (DFIs’) normal own account finance and/or commercial would immediately address these challenges, including finance from other investors, to develop private sector more clarity on the “withholding tax”, development of markets, address the Sustainable Development Goals, a green taxonomy, and creation of a blended finance and mobilize private resources. Collaboration between framework that would provide much needed clarity and public, private, and philanthropic capital is critical facilitate inflows. As a way forward, a few short- and long- for unlocking development gains and addressing term interventions have been identified to harness the massive global challenges such as climate change. full potential of blended finance. These include engaging Key principles, agreed upon by 23 DFIs including IFC, more with donor partners and DFIs, creating institutions provide a common framework to deploying blended and governance structures to increase transparency, concessional finance. identifying and addressing market barriers, and building the awareness and capacity of all relevant stakeholders. 6 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Background and Rationale 1 1.1 Climate change requires concerted 2. To adopt a climate friendly and a cleaner path than the action—India taking strong steps one followed hitherto by others at a corresponding level of economic development. Shifting to a low-carbon and sustainable economy is 3. To reduce the emissions intensity of its GDP by 45 percent increasingly becoming a mainstream goal globally. Several by 2030, from the 2005 level. countries, including India, committed to mitigating climate 4. To achieve about 50 percent cumulative electric power change at the COP26 Summit in Glasgow in October 2021. installed capacity from non-fossil fuel-based energy To meet India’s COP26 ambitions, the Prime Minister resources by 2030, with the help of transfer of technology of India announced the Panchamrit commitments, and low-cost international finance including from the comprising the following: Green Climate Fund (GCF). 5. To create an additional carbon sink of 2.5 to 3 billion  India will increase its non-fossil-fuel energy capacity to tonnes of CO2 equivalent through additional forest and 500 gigawatts (GW) by 2030. tree cover by 2030.  India will meet 50 percent of its energy requirements 6. To better adapt to climate change by enhancing from renewable energy by 2030. investments in development programs in sectors  India will reduce its total projected carbon emissions by vulnerable to climate change, particularly agriculture, 1 billion tons by 2030. water resources, the Himalayan region, coastal regions,  By 2030, India will reduce the carbon intensity of its health and disaster management. economy by 45 percent. 7. To mobilize domestic and new and additional funds from  By 2070, India will achieve the target of net-zero carbon developed countries to implement the above mitigation emissions. and adaptation actions in view of the resource required and the resource gap. As per provisions of the Paris Agreement, India submitted 8. To build capacities, create domestic frameworks and an update to its NDCs in August 2022 to the UNFCCC, for international architecture for quick diffusion of cutting- the period up to 2030, as follows: edge climate technology in India and for joint collaborative R&D for such future technologies. 1. To put forward and further propagate a healthy and sustainable way of living based on traditions and values Between 2005 and 2016, India reduced its emissions of conservation and moderation, including through a intensity by 24 percent. As of February 2023, renewable mass movement for ‘LIFE’ – ‘Lifestyle for Environment’ as energy sources (including large hydro) contributed to about a key to combating climate change. 41 percent of India’s total installed capacity and the country stands fourth globally in terms of total renewable energy installed capacity. BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 7 1.2 India’s climate financing gap is 1.4 Need for private investments in substantial climate transition As per estimates in India’s updated NDCs, the country As climate change is now one of the biggest challenges needs substantial amount of climate finance in order of facing the world, and against the backdrop of shrinking tens of trillions of dollars by 2050 to achieve its ambitious fiscal space, it is imperative that substantially higher private sustainability targets. From 2026-2030, India will require investment is channeled towards climate financing to help annual clean energy investments in the range of $253- achieve the mitigation and adaptation targets required $263 billion (rising to $325-$355 billion over 2031-2035) to to keep the world on a pathway with less than 2°C of align with sustainable development and climate goals warming. However, scaling up private sector investment (IEA-IFC, 2023). Other estimates, which take into account in climate objectives has proved to be a challenge despite the investment gap (the difference between what is the trillions of dollars committed to these objectives after required and what could reasonably be made available the recent COP26 Summit. Private sector financing is from conventional sources) to achieve net-zero by 2070, urgently required, especially in developing countries in the suggest that the total funds required amount to $10.1 process of transitioning to net-zero emissions. To achieve trillion (Singh and Sidhu, 2021). However, the current this, institutional investors need to be tapped as they have investment available for climate action in India is only $44 substantially greater resources (900 times more funding billion per year (Climate Policy Initiative, 2022). available than in DFIs) (Diop, 2022). However, for this to happen, there is a need to ensure an investment ecosystem 1.3 Global climate financing trends that provides bankable projects, fosters regulatory certainty, encourages financial sector innovation, and undertakes The Climate Policy Initiative (2022) shows that total global extensive capacity building for all stakeholders involved climate finance steadily increased over the last decade in the process. For emerging markets, one of the biggest to $653 billion annual average, but investment has been challenges is to reduce the risk associated with climate- slowing over the past few years. According to that analysis, related projects that still act as barriers to investment. annual climate finance needs to increase by 590 percent to Often such barriers include new-technology adoption risks, meet internationally agreed climate objectives by 2030. unproven commercial viability, and ramp-up uncertainties. The Initiative also shows that debt remains the dominant In this context, there is a case to substantially scale up the source of climate finance globally, as seen in Figure 1. use of blended finance. It helps to rebalance the risk-reward metrics and facilitates de-risking of projects, which would in Of the total debt financing, low-cost debt made up only 12 turn lead to greater investor interest. percent and has decreased since 2018. Also, 99 percent of this debt is provided by public institutions. It is important to note that the blended finance instruments being discussed here are those that seek to reduce the risk profile of an investment, which could also reduce the overall Figure 1: Climate Policy Initiative: Instruments used for cost of funding depending on the degree of concessionality climate investments compared to outright grants. This also depends on the changing landscape for blended finance investment in the 700 country. In the Indian context, for example, grid-connected 6% utility-scale renewable energy has now achieved grid parity 600 5% with fossil fuels, so blended finance is not needed. However, there are emerging sectors that do need blended finance, as 500 4% highlighted in Section 5. $ billion 400 The Climate Policy Initiative report (2022) indicates 66% 61% that approximately $39.1 billion of blended finance was 300 66% channeled towards climate investments between 2015 and 2020. Most of the funding focuses on mitigation. 200 The case for investing in climate mitigation and 100 29% 33% adaptation has never been stronger. The need for 30% massive investments in green infrastructure, industry 0 decarbonization, and the shift of global economies 2015-16 2017-18 2019-20 toward net-zero emissions is pronounced and urgent. The speed and depth of the transformation cannot be Equity Debt Grant achieved with public funding alone. 8 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Introduction to Blended Concessional Finance 2 B lended finance for private sector projects is one of the most impactful tools that DFIs can use in cooperation with donors and other development partners to achieve and agreed to follow five key principles (see Figure 2). Application of these enhanced principles helps ensure the effective and efficient use of concessional resources in a variety of goals. These include implementing the Addis private sector projects and avoids market distortion or the Ababa Action Agenda, helping to address the Sustainable crowding out of private capital. Development Goals, increasing finance, and mobilizing private capital for important private sector activities Note: The Organisation for Economic Co-operation and (Development Finance Institutions, 2021). Development’s (OECD’s) Development Assistance Committee (DAC) has also adopted five blended finance principles for Blended finance is capital from public or philanthropic sources unlocking commercial finance for the Sustainable Development used to increase private sector investment in developing Goals. The principles were elaborated on in close collaboration countries and to catalyze risk-adjusted financing to address with the previously referenced DFI enhanced principles. The critical challenges facing the world. The DFI Working Group OECD principles are targeted at the policy level, reflecting the on Blended Concessional Finance for Private Sector Projects, development mandate of donors—providers of concessional a group of 23 DFIs, has adopted the following definition capital—and the policies and instruments under their political of blended concessional finance for the private sector oversight. The OECD’s principles focus on broad policy guidelines operations of DFIs: combining concessional finance from with respect to providing finance to DAC members to conduct donors or third parties alongside DFIs’ normal own-account blended finance operations in both public and private sector finance, and/or commercial finance from other investors, projects. Under the OECD definition, blended finance includes to develop private sector markets, address the Sustainable concessional finance as well as technical advisory grants, and Development Goals, and mobilize private resources. other finance. More information is available at www.oecd. org/dac/financing-sustainable-development/blended-finance- The standard business model of a DFI includes providing principles/ financial products at commercial rates in higher-risk environments to achieve development impact that the 2.1.1 Evaluating blended finance for climate private sector alone cannot achieve. For some projects Blended finance supports projects that neither the project with significant expected development impact in the company nor the DFI will be able to finance on purely context of persistent market failures, high risks—including commercial terms. The entity providing concessional first-mover transaction costs, new technologies, or finance will assess the project’s eligibility in line with the novel business models—may make these projects non- five principles described earlier. If the project meets the viable, even for DFI-led projects. Blended finance is one of criteria of the donor or DFI, then the support conferred can several tools developed by the international development be structured through a combination of levers. community to mitigate the risks of a highly impactful project or to de-risk or rebalance the risk-reward structure In summary, there is no one-size-fits-all approach for a at a program level. This accelerates the development of the blended finance transaction. The specific instrument used entire sector, moving it closer to commercial sustainability. for blended finance—whether it is debt, equity, a risk- sharing facility, a guarantee product, or a performance- The use of blended finance helps to fill financing gaps by based incentive structure—should be specifically designed addressing market barriers and attracting private sector to meet the development challenge at hand (e.g., climate investments to areas of strategic importance with high change). De-risking private investments through blended development impact. finance cannot substitute for systematically addressing public policy failures or capacity constraints. As such, 2.1 Enhanced principles for using alongside blended finance investments, DFIs may need concessional finance in private to provide advisory services as well as policy or other sector investment operations interventions that support the country to remove barriers to investment and enhance the operating environment To ensure a strategic and disciplined approach to blended for private business. To this end, IFC works “upstream” by finance, the DFI Working Group on Blended Concessional proactively helping to create conditions to stimulate the Finance for Private Sector Projects has developed flow of private capital into productive investment. BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 9 Figure 2: DFI enhanced blended concessional finance principles for private sector projects 1 2 3 4 5 Rationale for Crowding-in Commercial Reinforcing Promoting high using blended and minimum sustainability: markets: standards: finance: concessionality: DFI support for DFI support DFI private sector DFI support for DFI support for the private sector for the private operations should the private sector the private sector and the impact sector should seek to promote should make a should, to the achieved by each be structured to adherance to contribution that extent possible, operation should effectively and high standards is beyond what contribute to be sustainable. efficiently address of conduct in is available, or catalyzing market DFI support market failures their clients, that is otherwise development and must contribute and minimize the including in the absent from the mobilizing private towards the risk of disrupting areas of corporate market, and sector resources commercial or unduly governance, should not crowd and minimize the viability of clients. distorting markets environmental out the private use of concessional The level of or crowding out impact, social sector. Blended resources. concessionality in private finance, inclusion, concessional a sector should be including new transparency, finance should revisited over time. entrants. integrity, and address market disclosure. failures. 10 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA IFC has developed strong governance processes to ensure  Lower seniority (order in which financiers are repaid by that these principles are consistently applied, including an the company) independent decision-making framework for allocating  Longer repayment profile (amount and timing of development partners’ scarce blended finance resources. principal repayments) Clear diagnostic criteria and a clear rationale are critical to ensure that the only activities supported are those that In 2018, the DFI Working Group on Enhanced Blended deliver significant developmental benefits and would not Concessional Finance for Private Sector Projects defined occur without the use of blended finance. Furthermore, the level of concessionality in a blended finance transaction these investments must show a well-mapped path to as the “estimated monetary equivalent of the concessional sustainable commercial financing without subsidies terms and conditions of the transaction, assessed by the (Sierra-Escalante, 2021). institution extending concessional financing”. Usually, the concessional price is based on a reference price, which 2.2 Transparency comprises risk, cost, net profit, and the “concessional price” charged by the blended finance co-investor (IFC, 2022b). Transparency and good governance are paramount in the The “minimum concessionality” principle requires that blended finance environment: there must be transparency the level of subsidy should not be greater than necessary regarding the use of public funds, processes that address to induce the intended investment. To provide a DFI potential conflicts of interest, and the separation of example, Table 1 indicates average concessionality levels decisions and decision-makers on operations from those for IFC projects between financial years 2010 and 2022. on blended finance. Institutions look to minimize the amounts of concessional finance so that market distortions can be avoided. There is a positive trend of increased rigor and governance systems being designed to support the careful allocation and use of blended finance across DFIs. In 2019, IFC announced it would hold itself to the highest standards of transparency when deploying concessional resources by disclosing the estimated concessional level as a Table 1: Historical data on concessionality levels by percentage of total project costs. The concessional level blended finance instrument (FY10-22) for each proposed project is disclosed in the summary of investment information along with the justification for Average concessional why it is necessary. IFC is the only DFI or blended finance level as a percentage of implementer taking this step to date and is using this total project cost approach for all of its blended finance facilities. Overall 4% By product 2.3 Determinants of concessionality Senior debt 3.2% Concessional financing is financing on terms and/or Sub debt 3.7% conditions that are more favorable than those available Guarantee 5.3% from the market (IFC, 2022b). Concessionality can be Equity 2.3% achieved through one or a combination of interest rates or expected returns below those available on the market and Performance incentive 1.3% other terms that would not be accepted or extended by a Above products are in hard currency. Transactions in local commercial financial institution. These terms may include: currency would have an average concessionality of 10.7 percent.  Longer interest-free periods (time before interest or other payments are required)  Reduced collateral (rights to claim certain company assets if the loan is not repaid) Concessionality can be achieved through one or a combination of interest rates or expected returns below those available on the market and other terms that would not be accepted or extended by a commercial financial institution. BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 11 3 Blended Finance Models—Approaches, Instruments, and Evaluation Methodologies 3.1 Blended finance instruments The risk-return profiles of investments in emerging and to the donors (e.g., government or philanthropic funders). frontier markets often do not meet the expectations of In this regard, blended finance instruments can be used to commercial investors. To attract private capital, real or address many of the barriers limiting private capital from perceived risks—such as macroeconomic, regulatory, investing in developing markets or in high development credit, technical, off-take, or market risks—must be impact projects and sectors. The main product types in managed, mitigated, or transferred from the private sector blended concessional finance are shown in Table 2. Table 2: Different product types in blended concessional finance Instruments Description Indicative leverage Senior debt Loans with a top priority for repayment, provided at below-market interest rates or Low other non-commercial terms (e.g., maturity, grace period, security, or repayment profile). Subordinated debt Loans with a lower priority for repayment (or with interest or principal payments Higher than senior deferred in certain pre-agreed situations) provided at below-market interest rates or loan with other non-commercial terms. Equity An ownership stake in a company or participation in a fund, with return expectations High below what market investors would expect or equity returns subordinated to market investors. Performance- Instruments that provide incentives and disincentives to achieve desired outcomes or Very high based incentives results (i.e., tie at least a portion of payments to achievement and aim at rewarding innovation and successful implementation). Due to their focus on structuring a transaction that leads to a measurable outcome pre-agreed by all parties, these results-based financing instruments allow various stakeholders with different interests to align. Guarantees or These instruments transfer all or part of the financial risk of a loan or group of loans High risk-sharing to the guarantor, with fees charged at below-market rates; this could be, for example, in the form of a first-loss protection, where the donor guarantees a portfolio of investments of a financial intermediary and pays out before the senior guarantor in case there is a payment default. The instruments are used mostly as an additional, supporting layer for other instruments. Local currency The provision of long-term local currency financing can reduce the risk of losses from Low currency fluctuations. Companies with revenues in local currency should generally borrow in their local currency, instead of borrowing in a foreign currency, which leads to currency risk. Local currency denominated loans may be provided to clients that operate in markets where there are limited currency hedging capabilities. Risk mitigation Project-based guarantees, either in the form of political risk insurance or liquidity High guarantee support, for large infrastructure projects whereby the donor de-risks the country and project level risks for private sector participation. Grants and Grants and technical assistance come from the same source of capital, which is - technical usually developmental and philanthropic. The biggest characteristic that sets these assistance instruments apart is that the capital is provided without expecting any financial return. This includes advisory, capacity building, strategic, or technical support to the investee business, provided either pre- or post-investment. These instruments deploy resources for early-stage project exploration and improve a project’s financial viability by offsetting high upfront transaction costs and reducing the uncertainty of the project becoming operational. 12 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA According to the 2021 DFI Working Group joint report, projects in 2019 (DFI Working Group, 2021). However, in senior debt comprised about 45 percent of total blended 2021, the share of senior debt declined to 42 percent while concessional finance commitment volume and was the other instruments such as risk-sharing facilities and equity most prominent blended finance instrument in new gained prominence, as shown in Figure 3. Figure 3: Concessional commitment volumes for 2021 (Development Finance Institutions, 2023) Performance grants 5% Grants 5% Senior debt 42% Risk-sharing facilities or guarantees 21% Sub debt 11% Equity 16% BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 13 4 Case Studies for Blended Concessional Finance 4.1 Sample IFC projects with blended models (offsite and rooftop projects) and across states in finance support India. It is also IFC’s first senior secured debt investment globally in the rapidly growing C&I DG sector, a promising India demonstrative project that could ramp up investments in this key sector.   The first blended finance loan in India in nearly a decade was committed in 2023 after overcoming the withholding tax 4.1.2 Green, affordable housing obstacle for blended finance structures (see section 6.2.4 Three breakthrough green housing projects in India aim to Clarity on withholding tax for providers of concessional catalyze India’s affordable housing space, promote green finance). The following section includes examples of recent construction, and support India’s climate goals.  Aadhar IFC blended finance transactions in India in addition to Debt,  Home First, and IIFL Home Finance Limited other examples of climate investments supported by IFC include a performance-based inventive (PBI) supported blended finance globally. by the UK’s Market Accelerator for Green Construction (“MAGC”) Program as part of the financing package. 4.1.1 Renewables This blended concessional finance incentivizes self- The Fourth Partner project will contribute towards constructors to partially offset the incremental costs of decarbonization of India’s power sector by providing the building green, allowing clients to help their retail clients Commercial and Industrial (C&I) companies in India with overcome additional costs to obtain EDGE green-building clean, reliable and cost-effective power. IFC committed a certification and for green design features that support local currency-equivalent US$52mn senior secured loan GHG reduction. In aggregate through these interventions, to Fourth Partner Energy Limited (“FPE”) subsidiaries to IFC is expected to support the development of more than finance 170 MWp of distributed generation (DG) assets 10,000 green certified self-built housing units in India, across India. The Project comprises a diversified portfolio the majority of which are expected to be for the affordable of solar PV projects, including a 75 MWp offsite solar park housing segment. Developing the nascent green housing and rooftop solar assets aggregating to 95 MWp selling segment in the country and expanding access to adequate electricity to “C&I” consumers. The IFC debt package also affordable housing finance is key for inclusive and includes US$17mn subordinated debt from IFC in addition sustainable economic growth in India. to concessional funding from the IFC-Finland Blended Finance for Climate Program and the Canada-IFC Blended 4.1.3 Climate-smart agri Climate Finance Program. This is a first of its kind financing IFC is also using blended finance for climate-smart agri to package in India to finance C&I DG assets at scale by catalyze more private sector capital into this critical area. aggregating a large number of projects across business IFC is making an equity commitment of up to $12 million 14 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA in Omnivore Agritech & Climate Sustainability Fund 3 investment (as part of the total $150 million debt fund) (“Omnivore III”), a venture capital fund. The Fund will includes $30 million from IFC’s own account and a $15 invest in Agri and FoodTech companies in India, including million loan from the multi-donor Climate Investment companies with operations in India and Southeast Asia. Funds’ Clean Technology Fund Dedicated Private Sector IFC as an implementing entity of the Bill and Melinda Gates Programs III. Foundation Inclusive Agritech Facility will provide up to US$4.6 million in a first loss equity guarantee to enable 4.1.7 Improving access to electricity (Mozambique) IFC’s investment into the Fund which will in turn support Access to energy has been at a crisis point in Mozambique the development of digital solutions that will improve for some time, with only 34 percent of the population productivity, efficiency and competition in the ag-tech having access to electricity. A 450 MW gas-fired power sector in India. plant in Mozambique is expected to help the country improve access to electricity and provide lower-cost Global power to primarily low-income households. The project is expected to increase the supply of low-cost electricity 4.1.4 Modern waste-to-energy plant (Vietnam) in Mozambique, which helps to meet growing domestic IFC is supporting the construction of a waste-to-energy demand and supports implementation of the country’s plant in Bac Ninh province in Vietnam. The aim is to ambitious electrification program, with important increase the province’s waste treatment capacity and economy-wide effects. The total project cost is estimated reduce its environmental footprint while protecting at $624 million and blended finance co-investments residents from health risks associated with untreated are expected through the International Development waste. IFC’s support includes a $15 million blended finance Association Private Sector Window in the amount of $15 loan from the Finland-IFC Blended Finance for Climate million in senior debt and up to $63 million in subordinated Program, which seeks to catalyze innovative investments debt. Blended finance support is justified due to the limited and unlock private financing for climate-smart projects availability of long-term commercial financing due in in low-income developing countries, creating markets large part to the high risks linked to the power sector and and opportunities for the private sector in places that macroeconomic conditions in Mozambique. The project banks and other investors have traditionally deemed “too will provide affordable and highly flexible/dispatchable risky”. IFC will provide long-term US dollar-denominated generation which will enable more renewable energy financing that is not readily available for waste-to-energy additions to the grid and is expected to provide electricity plants from domestic or international lenders due to a lack to meet the demand of 1.5 million households and will of bankable contractual frameworks that would be needed contribute about 14 percent of the electricity supply for international project financing. capacity available to meet demand in Mozambique. 4.1.5 Affordable green housing (South Africa & Sub- 4.1.8 Climate-smart agriculture (East Africa) Saharan Africa) IFC and the Global Agriculture and Food Security Program ZAR 2.4 billion (about $300 million equivalent) affordable are supporting the design, construction, operation, and housing fund has been set up to provide equity to develop maintenance of seven run-of-the-river small hydropower affordable housing projects, primarily in South Africa plants across East Africa with a total installed capacity of and selectively in Sub-Saharan African countries. IFC 16 MW at various locations, at a total cost of approximately participated through an equity investment of $25 million $70 million. The small plants will provide captive power (not exceeding 20 percent of the total fund size). In generation for tea factories and will sell any excess to addition, a $10 million concessional investment from the the state-owned utility company. The project will directly Global Environment Facility, through the IFC Earth Fund increase incomes of 350,000 smallholder tea farmers, Platform, supported the fund to invest in affordable green who will receive: (a) as tea factory owners, higher green housing projects in South Africa. leaf payment and profit margins due to lower energy costs; and (b) as shareholders, higher dividends due to additional 4.1.6 Working capital for makers of clean energy revenue streams from energy sales to the utility company. devices (Multi-region) Once constructed, hydropower plants carry low technical An open-ended debt fund is providing working capital risk, limited running costs, and a long lifecycle of up to loans and (eventually) longer-term debt to manufacturers 100 years. They significantly reduce production costs in and distributors of energy access products, such as solar the long term and help ensure high quality of processed devices and solar home systems. The expansion of the tea by improving the reliability and continuity of power energy access market is expected to create local jobs in supply. Another aspect of savings to farmers provided by the distribution supply chain in various countries in Africa, the project, which is not captured quantitatively, will be a Asia, and across other regions. A $45 million quasi-equity reduction in production losses due to power outages. BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 15 5 Sectors Requiring Blended Finance for Climate A n analysis of India’s greenhouse gas (GHG) emissions profile shows that the energy sector accounts for about 75 percent of total national GHG emissions, as While there is significant focus on mitigation, however, investments in adaptation/resilience also need to be increased given the country’s vulnerability to climate shown in Figure 4. Electricity production was the single change. India’s large population and economic dependence largest source in the energy category, accounting for on agriculture means that the country is continuously about 40 percent of it. This was followed by manufacturing exposed to the effects of unchecked climate change. Rising industries and construction at 18.68 percent, and transport sea levels would impact many communities in coastal at 13 percent (Ministry of Environment, Forest and Climate areas, mainly through damage to capital infrastructure. Change, 2021). According to the World Bank climate risk India profile, without adaptation measures, extreme river floods are Energy use has doubled since 2000, with coal and oil expected to affect an additional 13 to 34 million people serving as the bedrock for industrial development and by the 2040s, and coastal flooding is expected to affect modernization (International Energy Agency, 2021). another 5 to 18 million people from the 2070s to the end of However, India’s per capita energy use and GHG emissions the century. are still lower than in developed countries (Ritchie, 2021). As the country grows, its GHG emissions will increase The United Nations Environment Programme Adaptation along with the population and rising consumption unless Gap Report 2016 estimated that annual costs of adaptation concerted action is taken to reduce emissions. in developing countries could range from $140 billion to $300 billion annually by 2030 and rise from $280 billion to 5.1 Vulnerability assessment $500 billion by 2050. According to a Swiss Re Institute estimate, India may 5.2 Strategic sectors for mitigation and lose up to 35 percent of its GDP by 2050 due to severe adaptation temperature increase if GHG emissions are not reduced globally. Developing and deploying climate technologies As India scales up renewable energy as a share of total is critical for India’s net-zero plan, and estimates suggest generation, challenges of intermittent power supply can be that, on average, the country needs $200-350 billion per alleviated through energy storage solutions that will ensure year for its mitigation action alone. quality of supply. India is particularly well placed to become Figure 4: Sectoral GHG emissions data, 2016 Waste 3% Agriculture 14% Industrial processes and product use 8% Energy 75% 16 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Table 3: Possible climate investment areas Mitigation areas Adaptation areas Power Agriculture Solar rooftop Drought- and pest-resilient crops Offshore wind Water efficiency Nuclear Improved and efficient practices Grid storage Crop diversification Grid modernization Agroforestry Transport Disaster management Fuel cell vehicles Early warning system Battery electric vehicles Climate proofing infrastructure and cities Waterways Freight modernization Battery storage Land use and oceans Biodiversity Land degradation Conservation and management of Agroforestry mangroves and coral reefs Blue economy Coastal zone management Industry Health Energy efficiency Health infrastructure Green hydrogen Hydrogen storage Carbon capture and utilization Infrastructure Buildings and construction Energy efficiency Waste management and circular economy Material efficiency Waste and wastewater management a global leader in renewable energy and battery storage it is reasonable to assume that adaptation funding solutions that could create a market worth up to $80 billion requirements will also be substantial. Therefore, access in the country (International Energy Agency, 2021). to low-cost, long-term capital is key to achieving net-zero emissions. India has significantly developed its climate actions, resulting in a path to achieving its NDC well before 2030. It Focus areas that can play a crucial role in mitigating carbon is the only G20 nation in line with 2°C warming compared emissions and adapting to climate change are described in to its fair share contribution to climate action (Climate Table 3. Action Tracker, 2021). However, these efforts have been mainly due to public initiatives (Deloitte India, 2021). A market exists for India’s green transition. A higher capital flow such as through blended finance could accelerate the The infrastructure that India needs up until 2070 to be adoption of crucial green sectors, thereby reducing costs climate-resilient warrants an increase in the private through economies of scale and setting the country on a sector’s contribution, including foreign capital. Given path to net-zero emissions. the size of India’s economy, landmass, and population, BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 17 6 Policy and Regulatory Environment A ttracting climate-related investment is fast emerging as a key policy priority in India. Initiatives to catalyze these investments have significantly ramped up over the Affairs imposed mandatory reporting of progress on corporate social responsibilities under the Companies Act, 2013. In October 2017, the Committee on Corporate past decade. One of the first signs of efforts to connect Governance (SEBI) proposed that all boards of directors financial, social, and environmental issues occurred in of listed companies shall meet at least once a year to 2007 when the Reserve Bank of India issued a circular to specifically discuss strategy; budgets; board evaluation; raise awareness in the banking sector of the growing global risk management; environmental, social, and governance prevalence of corporate social responsibility, sustainable issues; and succession planning. development, and non-financial reporting. The Reserve Bank of India has also taken proactive In 2008, the National Action Plan on Climate Change policy measures to promote and support green finance was formulated to outline the broad policy framework initiatives. Under priority sector lending, the Indian for mitigating the impact of climate change. The Climate central bank ensures that a certain portion of bank loans Change Finance Unit was formed in 2011 within the are directed towards specific, high impact sectors of the Ministry of Finance to coordinate various institutions economy that are considered to be important for overall responsible for climate-related financing in India. Since development and inclusive growth. It included the small 2012, one major strategic move has been to implement renewable energy sector under its priority sector lending sustainability disclosure requirements. The Securities and scheme in 2015. Under this scheme, firms in the renewable Exchange Board of India (SEBI) made it mandatory for the energy sector are eligible for loans of about $3.7 million (in top 100 listed entities (based on market capitalization at equivalent Indian Rupee) while households are eligible for Bombay Stock Exchange and National Stock Exchange of loans of about $12,200 (in equivalent Indian Rupee) for India Limited) to publish annual business responsibility investing in renewable energy (Reserve Bank of India, 2021). reports from 2012. In May 2017, SEBI issued guidelines In September 2019, India announced a target to reach 500 for green bond issuance that specified the disclosure GW of renewable energy installed capacity by 2030. requirements. In addition, the Ministry of Corporate Figure 5: Key green finance milestones in India Reserve Bank of India issued Issuance of circular on corporate social sovereign green responsibility, sustainable Implementation of Issuance of green bonds development & non-financial Sustainability Disclosure bond guidelines reporting Requirements by SEBI by SEBI for top 100 listed entities 2007 2022 2012 2017 2008 2021 National Action Plan 2015 Reserve Bank of India on Climate Change joins the NGFS formulated Inclusion of the renewable energy sector under the Priority Sector Lending scheme 18 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA The Reserve Bank of India has also taken proactive policy measures to promote and support green finance initiatives. It included the small renewable energy sector under its priority sector lending scheme in 2015. Since the first issuance of green bonds in 2015, India has 6.1 Key issues developed the second-largest green bond market among emerging economies (after China), with cumulative The blended finance market in India is nascent but at issuances worth more than $10 billion by private companies an inflection point. There is growing recognition of the and public sector entities. importance of collaboration between public, private, and philanthropic capital for unlocking development gains and At the end of April 2021, India took its commitment to addressing challenges such as climate change. However, green finance one step further when the Reserve Bank there are several bottlenecks hindering the market from of India became a member of NGFS. This will go a long realizing its potential. way in strengthening the financial sector’s response to climate change and developing a much stronger and more Some key challenges to the blended finance ecosystem in coherent, coordinated, and credible policy framework to India include: support green investment.  Gaps in knowledge among relevant stakeholders on how Most recently, the Government of India has proposed to structure these deals to issue sovereign green bonds in 2022-23 for mobilizing  The absence of a regulatory framework and lack of clarity finance for green infrastructure projects. As of February on taxation for blended finance structures 2023, 50 percent of the total target of about $2 billion of  Insufficient deep analytics to identify options that green financing has been raised in the first tranche. require concessionality. BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 19 Table 4: Concessionality instruments and list of indicative projects Performance- Technical Design stage Senior debt Sub debt Guarantee Equity based assistance grants incentives grants Solar thermal Battery storage Micro, small, Green hydrogen Green Off-grid Pioneering manufacturing and medium mortgage renewables climate fund enterprises financing through financial institutions Offshore wind Electric buses Climate-smart Cross border Efficient cook Carbon finance agriculture power trade stoves or solar fund financing (renewable lanterns through energy) financial institutions Round the Industrial de- Green E-mobility Green bonds clock power carbonization transport (e.g., financing (energy e-logistics, (operating and storage) green logistics) finance leases) Fuel switching Coal decom- Nature-based Energy service (coal to missioning solutions companies electric) contracting framework Sustainable Green hydrogen cities’ waste and water Some key challenges 6.1.2 Lack of standardized blended finance framework and associated knowledge gaps 6.1.1 Regulatory constraints associated with Market players lack adequate knowledge and experience concessional capital for climate projects in structuring these deals given the limited scale of India’s regulatory framework draws a clear distinction blended finance transactions in India. Most deals must be between funds that are deployed for not-for-profit (i.e., individually tailored, which increases their overall cost and environmentally beneficial in this context) versus for-profit makes the process cumbersome. In the specific context of activities. Funds that are classified under the corporate blended climate investments, this challenge is amplified social responsibility framework are not allowed to seek because of high upfront costs and risks. The specialized return on capital. In a similar vein, commercial enterprises knowledge required for tailoring and structuring such face challenges with respect to taxation and accounting deals is not easily available. Aggregating the relevant when they invest in not-for-profit activities. Regulatory data and knowledge is critical. It is therefore important amendments and clarifications are needed to allow easier to create open-source platforms to help share knowledge, blending of commercial capital with concessional sources experience, and lessons among investors, philanthropists, in order to de-risk investments. foundations, governments, and donor agencies. 20 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 6.1.3 Lack of sector analytics and measurement (e.g., a DFI) enters into an agreement with the entity that mechanisms originates the assets. The DFI would commit to share a A key constraint on increasing the amount and use of certain percentage of losses suffered by the originator blended finance in India is the lack of a mechanism for on a specified portfolio. This is an indirect exposure to a impact assessment and measurement. Investors are only portfolio for the DFI. Risk-sharing facilities are useful in willing to fund what they can measure. Impact-washing promoting portfolio expansion in a sector such as climate- (or “green-washing”) is when a company or fund makes related investments, which is either new for a financial impact-focused claims in bad faith, without having any institution or is associated with a higher degree of credit demonstrable positive social or environmental impact. risk. Currently, there is no enabling regulatory framework There is a need to develop a framework for demonstrating under the Foreign Exchange Management Act, 1999, and impact effectively, which would include laying out a clear related exchange control regulations pursuant to which impact thesis, mapping impact between partners, building DFIs can offer this in India. Such a framework could go a data capacity, and designing tools for data collection. The long way to de-risk decarbonization and help mobilize lack of globally recognized and ratified benchmarked capital for investments. Mandatory disclosure of the frameworks and nomenclature are major challenges facing percentage of first loss counter-guarantee tranches funded investors keen to channel finance towards impactful green by a donor is encouraged to prevent a race-to-the-bottom investments. dynamic while promoting catalytic impact through risk- sharing facility structures. Furthermore, there is a need for similar analytics in India to arrive at mitigation options which would require 6.2.3 Need to align guarantee fee cap on partial blended concessional finance. An indicative framework is credit guarantee mechanisms with risk profile shown in Table 4, and it does not preclude any identified A partial credit guarantee is a tripartite credit activity from being funded by a different instrument. For enhancement mechanism among the borrower, a lender example, electric buses may be eligible for a senior loan (bank or financial institution), and the partial credit (concessional) in addition to the sub debt or guarantees. guarantee provider. The provider (e.g., a DFI) commits While appraising the investment, the DFI or lender will to pay the lender a certain percentage of amounts due determine the most appropriate instrument. in the event that the borrower defaults on its payment obligation to the lender. However, current guidelines on external commercial borrowings issued by the Reserve 6.2: Steps to improve enabling Bank of India have constrained the DFIs’ ability to use the environment partial credit guarantee instrument in India. Primarily, the cap on the guarantee fee needs to be increased and 6.2.1 Formulation of a green taxonomy to scale up aligned with credit spreads that are allowed for loans investments under the guidelines for external commercial borrowings. The development of a green taxonomy that provides a common, benchmarked, and agreed-upon language and a 6.2.4 Clarity on withholding tax for providers of clear definition of what constitutes “climate”, “green”, and concessional finance “sustainable” finance is critical. While trying to calculate There are various providers of concessional finance the extent of climate finance flows, it is important to take including DFIs, impact funds, philanthropic capital, and into account that flows are new and additional rather private sector investors. Multilateral DFIs typically have tax than reassigned flows from other development projects to exemptions, including in respect of withholding tax, under climate action; climate-specific; grants or at concessional applicable treaties and related national laws that cover rates or otherwise at a a lower cost. As of June 2022, the blended finance products that they offer. However, a multilaterally agreed definition of climate finance is the tax regime differs significantly across the various other elusive, and a standing committee of finance in the United entities, and blended finance products offered by impact Nations Framework Convention on Climate Change is funds or other entities may not be exempt from tax. working on this. Therefore, to ensure that concessionality is not diluted and a level playing field is maintained, it is critical to have clarity 6.2.2 Introduction of innovative instruments such as on necessary tax exemptions. risk-sharing facilities A risk-sharing facility is a bilateral loss-sharing or risk mitigation mechanism where the provider of the facility BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 21 7 The Way Forward B lended finance has emerged as a critical lever to incentivize private capital flows and accelerate development impact in emerging economies, such as India. finance transactions is the limited information available to stakeholders, especially investors. Potential investors may find it useful to see data on blended It is expected to be an important instrument to catalyze finance transactions that are related to climate to the substantial investment needed by 2030 to fill the gap align with the government agenda. Further, mapping for climate financing in the country. It is also critical to note key stakeholders (such as existing or future donors, that public finance is central to scaling up climate finance. government programs, or initiatives) related to blended The role of the public sector, especially that of developed finance climate transactions in India could provide an countries, in catalyzing private investments at reasonable opportunity to explore potential collaboration and build cost and in a timely and adequate manner is vital. on credible transaction pipelines. This will also promote the measurement and monitoring of the impact of The government needs to take proactive steps to send blended investments towards climate initiatives. All positive signals to the private sector and investors for these initiatives could be shared on an online portal greater adoption of blended finance in the climate space. to provide a credible repository of innovative blended Adoption requires integration into national priorities finance solutions. to enable blended finance to play a meaningful role in providing the catalytic capital for climate-smart  Build institutional and individual capacity. It is critical that investments for better development impacts. government staff, policy makers, and local financial institutions adopt the most effective blended finance To harness the potential of blended finance, a detailed road solutions to mobilize investment (at project and map needs to be prepared with interventions based on the portfolio level). This requires imparting appropriate skills need or demand and the time needed to implement each for effective and efficient structuring of climate-related intervention.3 blended finance transactions by: 7.1 Short-term interventions - Increasing mobilization of domestic and foreign investors  Engage with donors and DFIs to understand and facilitate - Educating investors and exchanging knowledge. access to existing de-risking instruments such as first- loss guarantees, subordinate debt, and equity solutions  Develop a regulatory sandbox. It is vital to conduct policy that can reassure investors in the climate space. and regulatory interventions that can catalyze the scale- up of blended finance solutions in India. One potential  Improve understanding and create awareness of climate- intervention that has shown considerable success in the related blended finance through dedicated workshops fintech domain in India is the creation of a regulatory and sessions for stakeholders in both public and private sandbox, where live testing of new products or services sectors. These could include: occurs in a controlled or test regulatory environment for which regulators may relax certain regulations. Such - An overview of blended finance—such as concepts, a sandbox would provide innovators, investors, and definitions, stakeholders, transmission channels and regulators with a conducive environment to design and instruments. test a wide array of blended finance deals. - An assessment of the current state and role of blended finance in scaling up private investments for 7.2 Long-term interventions development. - Stocktaking of potential pools of capital that could  Establish institutional structures. Mandate the be considered. establishment of a Blended Finance Task Force - Shared common principles and good practices on (preferably co-chaired by the Ministry of Finance and structuring blended finance. Ministry of Climate, Forest and Climate Change) to design a strategy and set clear and attainable targets. The  Create an online information platform to promote target should be time bound and measurable for blended transparency. One of the challenges hindering blended finance to achieve climate ambitions in India. The Task 22 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Force should have members from both government and Further, these identified barriers must be addressed the private sector to ensure objectives are aligned to all in a time-bound manner to enable blended finance to stakeholders. Further, it needs to be empowered to lead catalyze investment in climate-smart infrastructure. efforts and initiatives to guide implementing agencies on These barriers can be addressed by actions including best practices for structuring these transactions and help incentives and other initiatives to mobilize private ensure capacity building for organizations and their staff. finance; the establishment of a regulatory sandbox;  Enable an investment ecosystem and address regulatory and the promotion or creation of financial instruments barriers. A sound investment ecosystem would support such as risk-sharing facilities, enhancing credit, and higher quality and quantity of blended finance. While this providing performance grants. white paper identifies a few of the regulatory or policy barriers, there is a need for a holistic understanding of  Promote scale by focusing on proven and replicable blended the current barriers to climate investment in India to finance structures. The structuring of blended finance is address: often unique and complex in nature. It varies further with each transaction as the private sector looks for - Unstable policies or regulations that reduce the space better and more transparent blended finance structures for private investment to create a climate-smart asset that meets their - The lack of well-prepared, bankable, climate-smart investment criteria. The most appropriate blended infrastructure projects finance structures in the climate space need to be first - The lack of a climate-smart pipeline identified and then mobilized for private investors in the - Limited use of DFIs as deal originators Indian context. - The lack of financial channels. Table 5: Blended finance implementation road map in India Sl no. Suggestions Time frame Stakeholders 1 Engage with donors and DFIs to understand and facilitate Short term Ministry of Finance (MoF) access to existing instruments 2 Improve understanding and create awareness among Short term MoF in partnership with DFIs stakeholders (public and private sector including financial institutions) on climate-related blended finance (through workshops and sessions) 3 Create an online information platform to promote trans- Short term Government of India parency 4 Build institutional and individual capacity Short term DFIs to lead 5 Formulate a green or sustainable taxonomy Short term MoF 6 Establish institutional structures Long term Government of India—MoF or Ministry of Environment, Forest and Climate Change 7 Enable investment ecosystem and address regulatory Long term MoF in partnership with DFIs barriers 8 Promote scale by focusing on proven and replicable blend- Long term MoF in partnership with DFIs ed finance structures BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA 23 References Climate Action Tracker. 2021. 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Just In Time: Financing a Just Transition to Net Zero. Standard Chartered, London. https://www.sc.com/en/insights/just-in- time. 24 BLENDED FINANCE FOR CLIMATE INVESTMENTS IN INDIA Endnotes 1 The Addis Ababa Action Agenda was adopted at the Third International Conference on Financing for Development between July 13 and 16, 2015 in Ethiopia, which laid a strong foundation to support the implementation of the 2030 Agenda for Sustainable Development. 2 The figures may not reflect future trends as they are based on a limited sample size, and are likely to change as IFC introduces new products to expand the portfolio in low-income, fragile, and conflict-affected countries, where blended finance resources have become available at scale only in the last couple of years. https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/bf/bf-details/concessionality-calculation. 3 Short-term interventions indicate”low-hanging fruit” or opportunities for reform that are relatively ready to implement. The time indicates the level of complexity in implementing interventions i.e., more complex interventions require more time. For more information, contact: IFC_India_Front_office@ifc.org www. ifc.org/blendedfinance World Bank Group Publications The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org