India’s Pension Funds Role In Green Economy Transition
India faces a massive challenge in financing its climate goals. The country aims for net zero emissions by 2070. Achieving this requires $10 to $12.5 trillion in investment over the next 25 to 45 years. Additionally, climate adaptation demands about 2.5% of GDP annually by 2030. Mobilising such vast funds is critical for a successful green transition.
Climate Finance Needs in India
India’s climate targets involve huge capital demands. Net-zero goals require trillions of dollars for renewable energy, clean transport, and adaptation projects. Adaptation alone needs $100 billion yearly by 2030. Meeting these needs depends on mobilising diverse financial sources.
Pension Funds as Untapped Capital
India’s pension funds manage around $600 billion and grow 10% annually. Most investments are in government securities. However, pension funds rarely invest in climate-related sectors. Their long-term nature suits green investments. Instruments like Infrastructure Investment Trusts (InVITs), Alternative Investment Funds (AIFs), and corporate bonds with credit enhancement can attract pension fund capital.
Advantages of Pension Funds for Climate Investments
Pension funds have patient investors who rarely withdraw funds quickly. This aligns well with the long-term horizon of climate projects. Such investments may outperform carbon-intensive sectors during the green transition. Pension funds prefer low-risk investments in resilient companies, making them ideal for sustainable finance.
Long-Duration Liabilities and Climate Risks
Climate change poses systemic risks to financial stability. Pension funds have long-duration liabilities, as payouts happen decades later. This requires integrating climate risk into investment decisions. European pension funds already consider these risks to protect beneficiaries. Indian pension funds must follow suit as they shift from government securities to corporate assets.
Regulatory Gaps in Climate Risk Management
Regulations on climate risk disclosure for pension funds are evolving globally. Many countries require pension funds to report climate-related risks and opportunities. In India, regulatory guidance is limited. The Employees’ Provident Fund Organisation (EPFO) and National Pension System (NPS) manage most pension funds. NPS has a stewardship code promoting responsible investment but lacks enforcement power. Beneficiaries remain unaware of climate risk integration by fund managers.
Climate Risk Disclosure
NPS is part of the International Organisation of Securities Commissions (IOSCO), which sets standards for sustainability risk disclosure. Adopting these standards can help Indian pension funds assess transition and physical climate risks. Initiating consultations on climate risk, similar to the Reserve Bank of India’s approach, can strengthen sustainable finance. Pension funds can play a vital role in closing India’s green financing gap while safeguarding financial stability.
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