How India is sprinting to build a climate-ready financial architecture

As India races towards its twin ambitions—becoming a $40 trillion economy by 2047 and achieving net-zero emissions by 2070—it faces a formidable challenge: financing its energy transition.The task is immense. Estimates suggest that to meet its 2030 green targets alone, India must mobilise $170 billion annually, almost three times the current levels of investment in renewable energy, electric mobility, green hydrogen and industrial decarbonisation.advertisementOver the next four decades, that number could swell past $10 trillion. For a country where climate finance is still nascent, the numbers are sobering. But instead of viewing this as a constraint, policymakers are treating it as a design problem—one that needs a structural response.The government is now working on a twin-track approach to fix the climate capital bottleneck. The first involves building an institutional spine for green finance by transforming the National Bank for Financing Infrastructure and Development (NaBFID) into a strategic enabler of climate-aligned projects.
The second track aims at unlocking India's capital markets, tapping into the vast, growing pools of domestic savings and enabling public participation in the energy transition through reforms, instruments and investor trust.At the heart of the institutional push is a quiet but ambitious plan: the creation of a green-focused subsidiary under NaBFID. A team within NITI Aayog, working closely with the ministry of finance, has studied international models—from Brazil's BNDES (Brazilian Development Bank) to the UK's Green Investment Bank and Canada's Clean Growth Hub.advertisementThe discussion initially focused on exploring setting up a new green bank—a dedicated development finance institution (DFI)—to suffice the needs, along with tweaking the norms of priority sector lending for the scheduled banks. Most believe that setting up a new institute would take a lot of sweat and bureaucratic jockeying.The idea taking shape is that of a capital-light, flexible entity housed within NaBFID that can catalyse investments across a spectrum of green sectors: renewable energy, EV charging, storage, biofuels, clean manufacturing and hydrogen.Legally, the NaBFID Act already provides for such a subsidiary structure and even permits overseas operations. Financially, NaBFID is in a strong position, with Rs 20,000 crore in equity capital, another Rs 5,000 crore in grants, and a growing loan book of over Rs 50,000 crore. Officials working on the plan suggest that an additional Rs 10,000 crore infusion—well within the sovereign's capacity—could unlock lending capacity of over Rs 1.5 trillion over time.But the most intriguing part of the proposal lies in its geography. The proposal is that the new green subsidiary may be headquartered in GIFT City, Gujarat's international financial hub. The location offers strategic advantages. Since GIFT City falls outside the jurisdiction of the Reserve Bank of India (RBI) and is regulated by the International Financial Services Centres Authority (IFSCA), it provides greater flexibility in structuring instruments, raising global capital, and issuing green bonds not limited by India's sovereign rating.advertisementIn theory, this could sharply reduce the cost of capital for high-risk green projects and attract global pension and sovereign wealth funds looking for investable opportunities in emerging markets.However, not everyone is convinced. Critics of the NaBFID-centric approach argue that the institution, while well-capitalised, may not yet have the bandwidth or sectoral expertise required to navigate the highly technical, fast-evolving landscape of cleantech. Unlike traditional infrastructure such as roads, ports, or transmission lines—where risks are better understood and returns more predictable—green industries operate under very different risk profiles.The rapid pace of technological change, regulatory uncertainty and relatively short track records of most climate start-ups make them less compatible with conventional infrastructure lending frameworks. Without dedicated talent, bespoke underwriting models, and a deeper appreciation of innovation risk, there is a real danger that the green arm of NaBFID could become a box-checking exercise rather than a transformative force.Yet, institutions alone cannot solve the climate finance equation. India's broader capital markets remain underpowered when it comes to channelling savings into green growth. Consider this: despite over 225 million retail demat accounts—six times the number a decade ago—equity investment in cleantech remains marginal. Only about 4 per cent of India's clean energy finance comes from equity markets, compared to 35 per cent in developed economies.advertisementA joint study by the New Delhi-based think-tank Council for International Economic Understanding (CIEU) and Dalberg Advisors to develop the Bharat Climate Forum platform highlighted structural barriers: cleantech companies are underrepresented on SME (small and medium enterprise) and main boards; high-profitability thresholds block early-stage firms from listing; and the absence of sectoral indices keeps green companies largely invisible to institutional and retail investors.Even the sovereign's green bond programme, launched with fanfare, is struggling. The last issuance in 2025 saw just 30 per cent investor uptake, largely because of the lack of incentives or a 'greenium'. Without meaningful tax benefits, institutional mandates or strong post-issuance impact reporting, investors remain on the sidelines.What's missing is clarity. Both banks and investors say they lack confidence in identifying what qualifies as 'green' or 'transition-aligned' finance. To address this, the finance ministry, led by Nirmala Sitharaman, launched a public consultation in April 2025 to develop a formal green taxonomy for India—a definitional framework that classifies economic activities by their environmental impact.advertisementOnce finalised, this taxonomy will be crucial in standardising disclosures, verifying the greenness of bonds and loans, and aligning the financial sector with global norms like the EU Taxonomy. Globally, thematic indices have catalysed passive investment, green ETF creation, and public awareness. The FTSE Environmental Opportunities Index, China's CSI New Energy Index, and Canada's S&P Renewable Energy Index have outperformed mainstream indices and boosted green investment flows. India must build its own. More importantly, it will help rebuild trust in the integrity of green instruments and reduce fears of greenwashing.The lack of transparency is not the only hurdle. India's green finance ecosystem suffers from a problem of discoverability. There is no publicly available benchmark index for the country's energy transition firms. Globally, countries have launched green indices and ETFs to signal investor confidence and drive capital flows.China's CSI New Energy Index, the FTSE Environmental Opportunities Index, and Canada's S&P Renewable Energy Index have seen massive inflows and consistent outperformance. In India, despite evidence that cleantech SMEs outperform broader SME IPO indices, they remain under-tracked and underfunded. Creating such indices could trigger a virtuous cycle, enabling ETFs, improving firm visibility, and incentivising innovation.advertisementWhile regulators have begun to respond, the process remains fragmented. The RBI's green deposit framework—intended to guide banks in mobilising climate-aligned retail funds—has seen limited traction, again due to definitional ambiguities and unclear auditing standards. The IFSCA is developing a Transition Bond Framework aimed at hard-to-abate sectors like steel, cement, and chemicals, but it too will require alignment with national taxonomy, rating agencies and disclosures.The broader question is whether India can build a cohesive architecture in time to meet its targets. The urgency is undeniable. As climate risks intensify and fossil-fuel investments lose viability, India must redirect vast pools of capital into green sectors not just to meet environmental goals, but to safeguard long-term macroeconomic stability. A well-functioning climate finance system would not only drive the transition—it would also deepen India's capital markets, broaden retail participation and reduce dependence on foreign currency debt.There is no shortage of vision. From the corridors of North Block to the trading floors of GIFT City, the outlines of a new financial order are emerging—one that places climate risk at the centre of economic planning. But architecture alone is not enough. Execution will require political clarity, regulatory agility, institutional coherence—and above all, the right people with the right expertise. India's vault is ready. Whether we can fill it with the right kind of capital is the real test.Subscribe to India Today MagazineMust Watch

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