COP26 saw some ambitious commitments and pledges around net-zero, with China setting the target for 2060 and the United States and the United Kingdom by 2050. India also committed to becoming a net-zero economy by 2070, which is still an ambitious target given that it is the third largest emitter of carbon in the world, with relatively low per capita emissions (1.91 tonnes as compared to the 15.25 tonnes of US). With its rapidly growing population and an economy heavily dependent on coal and oil, its emissions are on a steep upward trajectory. India’s building sector accounts for 24% of the country’s total annual carbon emissions, while this number is 38% globally. These direct emissions have more than doubled between 2000 and 2017.
The Indian Green Building Council has set a target to net-zero buildings by 2050. However, according to the Global Alliance for Buildings and Construction, if the buildings sector aims to be net-zero carbon by 2050, the impact of the decarbonisation actions must be increased fivefold across the buildings’ value chain. This marks the beginning of a long and effort-intensive process. India is going through a massive urbanisation phase with approximately 11% global urban population living in Indian cities. Niti Ayog estimates that nearly half of the Indian population will be living in urban areas in a few decades. This will consequently increase the demand for affordable housing in urban areas along with the necessary infrastructure. Moreover, according to the World Green Building Council, green buildings have been demonstrated to save money through reduced energy and water consumption and lower operations and maintenance costs. This makes for a strong business case for the investors to invest in new and affordable green buildings in India without going through the conventional route of erecting the buildings and then retrofitting them to be green or energy efficient.
While this looks like a massive opportunity for the investors, there remains an issue of credibility on the nomenclature as to what constitutes a ‘Green Building’. To address this issue, there are several organisations providing ‘Green Ratings’ to the buildings. This includes agencies such as Indian Green Building Council, which has licensed the Leadership in Energy & Environmental Design (LEED) rating system from the US Green building Council. LEED is a framework for assessing building performance against set criteria and standard points of references. India has also developed its own rating system called Green Rating for Integrated Habitat Assessment (GRIHA), jointly with The Energy and Resource Institute. It is a three-tiered rating system consisting of 34 criteria categorised in four different sections. Bureau of Energy Efficiency has also created its own rating system for the buildings on a 1-to-5-star scale where more stars mean more energy efficiency. IFC’s edge certification is also gaining momentum in Indian green building landscape with 28 certified green projects in India as of 2022.
For the promotion of green building in India, central as well as several state governments have incentivised the green building construction. For example, Government of Andhra Pradesh offers 25% subsidy on total fixed capital investment of the project for buildings which obtain a green rating from IGBC. Likewise, some states offer an increased Floor Area Ratio for IGBC certified buildings. Gujarat government offers a part reimbursement of the certification fee. Similar government incentives are provided in the case of GRIHA ratings.
Despite these measures in place, green building remains one of the lesser prioritized subjects in climate adaptation. There are only a handful of products available in the market which can de-risk the investments or reduce the cost of capital for the developers. This only indicates towards the untapped potential this industry possesses. The IFC estimates a US $1.4 trillion opportunity for India. Today, green initiatives around the world are supported by an array of innovative financial instruments such as blended finance, sustainability-linked loans and bonds, green asset backed securitisation, asset tagging etc., which are applicable to the green building sector directly or indirectly.
At the outset, linking of interest rates for home loans with the star rating (BEE) or green ratings across the banking sector might serve the purpose of increasing demand at the individual unit level. The Partial Risk Guarantee Scheme for Energy Efficiency by BEE might be extended to the developers in green building sector as a de-risking mechanism. Real estate investment trusts or REITs might be established as the instruments for green building financing.
In conclusion, there is a need for robust regulatory and policy action for the green building and financial sector. Though there are some products and mechanisms which are directly applicable to the sector, there is a critical need for further innovation. In addition to the catalysing role that the private sector can play, public sector with long term risk appetite needs to step-up. The green rating systems need to be updated on a frequent basis in order to maintain the credibility of the investments.