As one of the world’s fastest-growing economies, India’s development story, thus far, is one for the books. This growth, however, is not immune from its climate-related challenges. Even as the country continues to make efforts for meeting its rising energy demand and support industrial expansion, it remains firmly dedicated to fulfilling its climate commitments.
To streamline the financing of climate projects, India needs to relook at how the designated capital is allocated, mobilised and scaled for climate solutions. Climate finance is often treated as another name for green energy funding. But such a narrow view overlooks some key areas where financing is needed the most. Viewing them as the same, leaves room for a precarious blind spot, one that could hold back the funding of India’s most critical climate needs.
When it came to financing renewable energy (RE) projects, financial institutions in India, including banks, treaded with caution. This was majorly due to early perceptions of risk around solar and wind technologies and uncertainty about their long-term viability. However, over the past two decades, their perspective in both the technologies and the sector’s potential has undergone a notable transformation.
That coal-based assets are finding it harder to attract funding today, and financing is widely available for solar, wind and battery storage, which underscores the growing confidence in India’s energy transition. But it also tells us something important: renewable energy is no longer the biggest challenge when it comes to climate-aligned finance.
The real challenge lies elsewhere.
Green finance has largely come to mean capital deployed toward commercially viable, environmentally beneficial projects such as renewable generation or energy efficiency. When it comes to climate finance, the scope is much larger and comprises investments that reduce emissions and strengthen resilience. It, particularly, covers areas where climate impacts are already being felt, but where returns are uncertain, indirect or dated. When climate finance is narrowly defined through the lens of bankability alone, the areas that matter most for protecting lives and livelihoods are the first to be excluded.
This distinction matters because some of the most important climate solutions in India struggle to attract capital.
Consider the nature of these gaps. Lending to farmers for buying modern harvesting equipment could significantly reduce stubble burning, which worsens air pollution and harms soil health - yet the return on investment is often indirect or uncertain, making financiers hesitant.
Likewise, in case of large-scale tree plantation initiatives, though there is a definite climate value, there is no predictable revenue stream to make it attractive for conventional financing models.
Furthermore, in the aftermath of extreme weather calamities, those affected have to rebuild their homes using climate-resilient materials. However, affordable funding is needed at the very moment when their incomes are disrupted and repayment capacity becomes uncertain.
Though these interventions deliver clear climate and social benefits, they are among the most difficult to fund. Consequently, governments are compelled to bear the disproportionate share of the financial burden, especially at the time of post-disaster recovery. This type of dependency is neither economically sustainable nor scalable in the face of mounting impact of climate change.
A critical limitation is in the core structure of India’s financial system. Banks primarily rely on short-term deposits, while climate-relevant assets typically require long-term capital. This asset–liability mismatch is well recognised in infrastructure financing and is equally acute in renewable energy. It becomes even more pronounced in climate adaptation projects, where cash flows may be uncertain, delayed or entirely absent. Even when there is intent to finance climate solutions, the broader financial architecture is not designed to support long-duration capital for assets that lack predictable revenues.
India can take inspiration from its renewable energy journey, which offers a crucial lesson as to how renewable projects did not gain investors’ confidence overnight. Financing scaled only after risks could be quantified, returns demonstrated and standardised frameworks were established through deliberate policy support and institutional learning.
Bankability, in other words, was engineered. Similarly, climate-critical activities need to be brought into the spotlight. This needs to be done with far greater urgency than in the case of renewable energy. With the quickening of climate shocks and rising vulnerabilities, waiting for these sectors to mature on their own is not an option.
India must take a different approach to the way it manages its climate finance. Suitable mechanisms need to be created for enabling the capital, especially toward critical areas. The first step is to develop financial instruments specifically designed for climate adaptation.
Outcome-based financing can link capital deployment to measurable climate benefits rather than immediate cash flows. Furthermore, public-private institutions need to work together to help standardise risk assessment of non-conventional finance instruments such as green bonds, carbon credits and impact investing, among others. Blended finance models, which combine patient public capital with private investment, can reduce risk and encourage more lenders to participate. Dedicated facilities can then direct capital to areas where climate need is greatest, not just where returns are easiest to predict.
India has already proved its mettle by scaling renewable energy – showcasing the positive outcomes of properly aligning finance, policy and purpose. It makes a strong case for why the next phase of the nation’s climate action strategy should be built on this success. When the understanding of what climate finance truly comprises expands, the country will be better poised to look beyond green energy and overcome the risk of bypassing its most urgent environmental challenges.
