Mobilising Finance for Climate Resilience and Green Transition: A Comparative Analysis of India, the West, and China
Based on two ORF’s online articles posted on sept 18, 2014 — “India Needs a Climate Insurance Market” by Arya Roy Bardhan and Lavanya Balasubramani and “The Role of Capital Markets for Raising Green and Transition Finance” by Ajay Tyagi and Rachana Baid, this critical-analytical essay makes the point that India’s climate goals can be achieved by mobilising climate insurance and capital markets for green and transition finance, addressing regulatory inefficiencies, socioeconomic disparities, and market readiness, drawing lessons from the West and China.
Introduction
The global climate crisis continues to escalate, demanding robust financial mechanisms to ensure a successful transition toward sustainable economies. India, a highly climate-vulnerable nation, faces dual challenges: the necessity of managing climate risks while fostering economic growth and development. With ambitious goals like reducing the emission intensity of its GDP by 45% by 2030 and achieving net-zero emissions by 2070, India must mobilise large-scale green and transition finance to mitigate its climate risks and achieve these targets. This essay critically explores the themes of climate insurance and capital markets as they relate to green finance. Drawing on comparative examples from the West and China, this essay analyses how India can harness these tools to build a more resilient and sustainable future, while addressing its unique challenges of regulatory inefficiencies and social inequality.
Climate Insurance: A Pillar for Climate Resilience
India is ranked as the seventh most climate-vulnerable nation globally, with millions of people exposed to floods, cyclones, and droughts on an annual basis. In this context, climate insurance emerges as a critical tool to manage the economic impacts of climate disasters. This is particularly important for India’s poorest citizens, who are disproportionately affected by climate-induced disasters and lack the resources to recover. By the end of this century, it is projected that nearly 50 million Indians could be directly impacted by extreme weather events such as river and coastal flooding.
One of the central benefits of climate insurance is its capacity to provide immediate financial relief post-disaster. This can help minimise economic stagnation, particularly in areas where bureaucratic inefficiencies delay government relief efforts. In fact, early intervention through climate insurance can have up to 3.5 times the economic impact compared to delayed financial assistance. A structured climate insurance market ensures timely and need-based disbursement of funds, preventing further economic loss and supporting faster recovery.
However, beyond merely being a post-disaster tool, climate insurance can also be a driver of climate mitigation and adaptation. A dual approach could involve adjusting premiums based on the environmental practices of businesses. Companies that lower their carbon footprints could benefit from reduced premiums, incentivising greener practices. For example, companies that invest in renewable energy or reduce greenhouse gas emissions would face lower insurance costs, thus aligning financial incentives with environmental sustainability. This model, already observed in some Western nations, could be effectively adapted in India to create a financial ecosystem that promotes climate-conscious business behavior.
Despite these potential benefits, the establishment of a robust climate insurance market in India faces numerous challenges. One significant issue is the readiness of private insurers to engage in the climate insurance market, given that climate-related risks are often difficult to quantify and predict. India’s private insurance sector is still developing, and without significant governmental support, private insurers may be reluctant to enter this high-risk space. This hesitation is echoed in developed markets as well, with insurers in the U.S. and Europe already pulling back from high-risk areas prone to natural disasters like wildfires and hurricanes.
Existing Frameworks and Lessons from Crop Insurance
India already has some experience with climate insurance frameworks, primarily through its agricultural crop insurance programs. For instance, the Pradhan Mantri Fasal Bima Yojana (PMFBY), which insures against crop losses due to unseasonal rains, pests, and other natural calamities, covers over 55 million farmers. While this scheme provides a glimpse into the potential of climate insurance, it also reveals critical shortcomings, such as bureaucratic delays and inadequate compensation, that plague the broader implementation of climate-related financial products.
The lessons learned from crop insurance can inform the development of a wider climate insurance market. For instance, parametric and weather-indexed insurance—already in use in the West and in some developing nations—could offer more efficient claims processing by tying payouts to specific weather conditions. These products simplify the insurance process by using real-time data, but their success hinges on accurate data collection infrastructure. In a country like India, where data infrastructure is often lacking, significant investments in technology and data systems will be required.
Socioeconomic Dimensions of Climate Insurance
One of the most compelling reasons to establish a climate insurance market in India is its potential to protect the country’s most vulnerable populations, particularly those in climatically sensitive areas like coastal regions and the Himalayas. These communities often have the least financial resources to recover from climate shocks. Micro-insurance schemes, which provide low-income households with coverage for a small premium, offer a viable solution to protect individuals from asset loss, livestock deaths, and health risks arising from climate-induced disasters. Such programs could have a profound impact on resilience and recovery in marginalised communities.
However, micro-insurance alone is not a panacea. To truly safeguard these vulnerable communities, broader socioeconomic reforms must accompany financial protections. Policies addressing income inequality, infrastructure resilience, and access to resources are essential in creating a comprehensive safety net for India’s poor. Without these foundational changes, climate insurance risks becoming a temporary fix rather than a long-term solution.
Green Transition Finance: A Critical Pathway for Industrial Transformation
Alongside climate insurance, green transition finance plays a crucial role in transforming India’s high-emission industries. The country faces the dual challenge of developing its economy while reducing its greenhouse gas emissions. Sectors like steel, cement, and transportation are critical to India’s industrial growth but are also among the largest contributors to greenhouse gas emissions. Green transition finance aims to support these high-polluting industries in adopting cleaner practices through financial mechanisms like green bonds, dedicated funds, and government initiatives.
India’s green finance market has grown rapidly, but there is still much progress to be made, particularly in developing its corporate bond market. Currently, India’s corporate bond market remains underdeveloped, lacking the depth and liquidity necessary to support long-term, large-scale green projects. In contrast, countries like Germany and the U.K. have established robust green bond markets that are instrumental in financing renewable energy projects and industrial transformations.
China, too, offers valuable lessons. As a global leader in green bond issuance, China has successfully channelled large sums of capital into clean energy projects and industrial decarbonisation efforts. India can learn from China’s approach, particularly in terms of leveraging government-backed funds to incentivise private sector investment in green technologies. For instance, China’s steel industry is a key focus of transition finance, with significant investments in new technologies to reduce emissions. India could replicate similar strategies to decarbonise its industrial sectors, using transition finance as a tool to modernise industries like steel and cement while maintaining economic growth.
Role of Capital Markets: Mobilising Private and Foreign Investments
Capital markets, both domestic and international, are crucial for raising the level of finance required to meet India’s ambitious climate goals. While India’s equity market has matured significantly in recent years, with a market capitalisation exceeding 120% of GDP, its corporate bond market remains underdeveloped. To fund the massive infrastructure investments needed for the green transition, India must deepen its bond market, particularly by introducing reforms such as credit enhancement mechanisms and green bond guarantee schemes.
In the West, green bonds have played a significant role in funding renewable energy and other green projects. In particular, countries like Germany have successfully mobilised capital for large-scale renewable energy projects through robust regulatory frameworks and investor protections. For India, providing risk guarantees for long-term green projects and offering tax incentives for green bond investments could help attract both domestic and foreign investors.
Foreign investment will also play a critical role in meeting India’s climate finance needs. It is estimated that two-thirds of India’s required green finance will need to come from international sources. Tapping into global markets, particularly through environmental, social, and governance (ESG) investment trends, offers India an opportunity to attract large-scale capital. However, foreign investors may be hesitant due to geopolitical uncertainties, currency volatility, and the high cost of hedging investments in Indian rupees. To address these concerns, India must collaborate with the Reserve Bank of India (RBI) to develop more robust currency hedging markets and create incentives to lower the risk of foreign investments.
Government Intervention and Regulatory Frameworks
The success of climate insurance and green transition finance in India depends heavily on government intervention and the establishment of clear regulatory frameworks. India’s regulatory bodies, such as the Securities and Exchange Board of India (SEBI), have already introduced several key initiatives, including the Carbon Credit Trading Scheme (CCTS) and guidelines for green bonds. However, to attract more private and international capital, the government must do more to reduce financial risks associated with green investments.
The introduction of a standardised green investment taxonomy, akin to the European Union’s sustainable finance taxonomy, would be a significant step toward ensuring transparency and accountability in India’s green finance market. Such a taxonomy would prevent greenwashing and provide investors with confidence that their funds are supporting genuine environmental projects. Moreover, government-backed risk guarantees and subsidies for green technology adoption could reduce financial barriers and encourage more private sector participation in green investments.
Conclusion
India’s journey toward climate resilience and a green transition requires a multifaceted approach, with climate insurance and capital markets playing central roles. Climate insurance is essential for protecting vulnerable populations and ensuring timely disaster recovery, while green transition finance can help transform India’s high-emission industries. By drawing lessons from the West and China, India can create a robust financial ecosystem that supports its ambitious climate goals. However, success will depend on addressing challenges such as underdeveloped bond markets, regulatory inefficiencies, and socioeconomic inequalities. Through proactive government intervention, international cooperation, and financial innovation, India can build a sustainable future that balances economic growth with environmental stewardship.