· 5 min read
India’s economy requires substantial capital over the next 30-40 years to achieve its net-zero ambition by 2070. While capital mobilisation for net-zero technologies has significantly increased in the past decade, a notable gap remains between the required and mobilised funds. Estimates indicate that India will need between $160 billion annually by 2030 and approximately $215 billion annually by 2070. However, Bloomberg New Energy Finance (BNEF) estimated that total green investments in India only reached $31.4 billion in 2023 and $47 billion in 2024. To bridge this critical financing gap, stakeholders, including policymakers and regulators, have focused primarily on banks and financial institutions. Yet, households—a vital source of finance—have received far less attention.
Households can be a potential source of financing for green transition
Households channel their savings towards the real economy through pensions and insurance funds, banks, and financial institutions based on returns, reputation, and stability. However, there has not been a concerted effort to encourage household savers, particularly young people to invest in India’s green transition, aligning their values with potential financial returns. India, one of the few countries with a high share of young adults, should focus on its youth as they are more aware of climate change and will bear the brunt of future climate impacts.
While the debate continues on whether sustainability adds value for investors, it is widely acknowledged that sustainability is a critical value driver for long-term investors. Funds with strong sustainability practices tend to perform better during crises, and various global assessments have identified a positive long-term correlation between ESG criteria and financial performance. Thus, adopting sustainability in investments is essential to mitigate ESG risks like climate change and support a sustainable economy. The long-term investment horizon of many Indian households aligns well with this longer-term horizon of where the financial benefits of sustainable investments are realised in the future. Thus, young investors whose investment horizon is longer should fundamentally be an attractive audience for this argument and can be leveraged to bridge the financing gap.
Climate literacy among households
Financial intermediaries, climate change communicators and campaigners can play a crucial role as educators, elucidating the financial risks of climate change alongside traditional financial performance and mobilising citizens’ savings for the ecological transition; a combination of transparency, education, and credibility is key. A significant challenge lies in whether financial intermediaries can effectively communicate these concepts to consumers who may have varying risk tolerances and motivations. Mobilising motivated, value-driven households requires collaboration not only with financial intermediaries but also with climate-focused civil society organisations.
Greenwashing – a risk that must be eliminated and mitigated
To address this, the conversation between customers and advisors must shift from a narrow focus on financial performance to include broader environmental and social considerations. Many savers recognise these challenges but lack clarity on how they impact their long-term savings. They often defer to their money managers for the ultimate decision-making.
A user-friendly website that clearly explains sustainable products could be invaluable for retail investors. For instance, "Towards Sustainability," launched by the Belgian Federation of Asset Management (Febelfin), provides detailed information on fund management processes, sustainability strategies, and policies regarding sensitive issues like weapons, tobacco, and fossil fuel extraction. As India is planning to develop a climate finance taxonomy, a similar website that clearly defines climate finance products can catalyse capital mobilisation for climate action from households.
Make the investment strategy clear
Funds may choose to sacrifice some financial returns to address climate change, but this trade-off must be transparent in their prospectus; misleading claims of “win-win” outcomes can lead to disillusionment and withdrawals if performance falters. As experienced by ESG funds that were launched by mutual funds in India, investors withdrew from ESG funds when many of them underperformed compared to the broader market index.
Design financial products to meet their requirements and spend enough to communicate about the products
Products that align with clients’ desires to invest and are easy to access for retail investors are key to mobilise their savings for the environment. Indian corporates have issued green bonds, but households rarely buy corporate bonds. Indian investors invest in equity or equity-linked investment schemes. To effectively connect customers with climate or similar funds, the industry must target the growing segment of retail investors eager to make active choices in sustainable finance. The introduction of thematic funds dedicated to climate transition is a promising step, allowing investors to engage directly with solutions to mitigate climate change. Thematic funds resonate well with retail investors because they tell a compelling story. Financial intermediaries need to convince citizens how it is protecting the environment and, at the same time, meeting the investment objectives of households. Financial intermediaries have a key role play here, to convince citizens how their savings can be used to protect the environment while generating returns for them. There is a gap here, and we must incentivise financial intermediaries and create an ecosystem for them to feel comfortable and keen to nudge relevant customers.
Long-term retirement financing is a critical issue, and sustainable finance offers a viable tool to tackle these challenges. Active participation of households can be a vital lever to accelerate capital for climate actions in India.
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