Financing plays a pivotal role in achieving climate goals by providing the necessary capital to support sustainable projects and innovations. Adequate funding is essential for the research, development and deployment of green technologies, as well as for scaling up renewable energy initiatives. Financial mechanisms such as green bonds, blended finance and concessional loans help de-risk investments and attract private capital. By bridging funding gaps, especially in early-stage and high-risk sectors, effective financing ensures that climate goals are met in a timely and efficient manner, promoting a transition to a low-carbon, sustainable economy. However, a key challenge hampering the energy transition has been financing gaps, which need to be addressed going forward.
This article provides an extract from EY’s report titled “Energy Transition: India’s Journey to Net Zero”, covering the report’s chapter on financing the energy transition. It covers various estimates of financing required to meet India’s decarbonisation goals, policy and regulatory initiatives to attract more green investments, and the key financing challenges and recommendations to solve these issues…
Financing requirements
Various estimates have been made about the total capital required for India’s decarbonisation journey. EY’s report estimates that approximately $150 billion-$200 billion is required annually to fund the country’s decarbonisation journey. This represents approximately 4-6 per cent of the Indian GDP. The current level of investment accounts for only about 25 per cent of the total required to meet the country’s nationally determined contributions.
Meanwhile, according to the Council on Energy, Environment and Water, India will need a cumulative investment of $10.1 trillion to significantly advance its climate transition efforts and achieve net zero emissions by 2070. Conventional, more secure funding sources are expected to cover about $6.6 trillion, leaving a significant investment gap of $3.5 trillion. This substantial financial requirement highlights the pressing need for innovative and non-traditional financing mechanisms.
Despite significant challenges and substantial funding gaps, India’s track record in securing green finance has been commendable. Climate Policy Initiative estimates for the fiscal year 2019-20 show that India raised $44 billion, with approximately 50 per cent coming from domestic private sources–a 150 per cent increase from the 2017-18 fiscal year. While these achievements are notable, they still fall short of the necessary targets.
Government’s incentives
The Indian government has implemented a range of incentives and policies to create a favourable environment for investors in the renewable energy sector. Through supportive measures such as subsidies and favourable regulations, the government is enhancing the investment appeal of these sectors. In the green hydrogen market, strategic targets and export incentives indicate a promising market with high returns. The biofuel sector, supported by blending mandates and technological advancements, is opening new avenues for investment. Similarly, in the electric vehicle (EV) sector, subsidies and infrastructure initiatives are reducing barriers to entry, making investment in this growing industry increasingly attractive.
These efforts are not only advancing India’s green economy but also providing investors with opportunities for sustainable and profitable ventures. Additionally, the government’s recent introduction of a “climate finance taxonomy” in the budget is a significant step forward. This initiative is designed to guide capital toward climate-resilient infrastructure and practices in sectors such as shipping, aviation, iron and steel, and chemicals, ensuring that investments are efficiently directed into genuine green projects, thereby increasing the availability of capital for climate-related initiatives.
Another noteworthy achievement is the successful issuance of India’s sovereign green bond. The inaugural green bond issuance in 2023 raised Rs 160 billion across two tranches, with maturities of five and ten years, respectively. This effort effectively channelled substantial funding into the country’s green initiatives, supporting its commitment to sustainable development.
Regulatory framework
India’s regulatory framework is evolving with a strong focus on sustainable finance, underscoring its commitment to environmental stewardship and climate action. The Reserve Bank of India (RBI) is playing a crucial role in fostering a sustainable financial environment. Its membership in the Network for Greening the Financial System highlights a significant dedication to sustainable finance. In 2023, the RBI introduced green deposit guidelines to channel domestic investments into sustainable projects. Additionally, the RBI is working to establish a comprehensive disclosure framework for climate-related financial risks, aligned with the Task Force on Climate-related Financial Disclosures, applicable to specific categories of non-banking financial companies. This move is prompting financial institutions to reassess their sectoral exposures and reorient their portfolios towards greener projects and sectors.
The Securities and Exchange Board of India (SEBI) is also enhancing environmental, social and governance accountability by mandating business responsibility and sustainability reporting for the top listed companies. SEBI’s recent consultation paper on sustainable finance aims to expand the scope of India’s green investment landscape. This proposed framework includes a broader range of instruments such as social bonds, sustainability-linked securities and sustainable securitised debt, reflecting a comprehensive approach
to sustainability.
Furthermore, the Carbon Credit Trading Scheme, part of the Indian Carbon Market Framework, is expected to provide a market-driven incentive for emissions reduction, offering a financial mechanism to reward low-carbon initiatives.
Challenges and recommendations
A major challenge impeding private investment in India’s climate sector, especially beyond mainstream areas, is the high capital requirement, particularly for early-stage companies. These ventures often need substantial funding for research, development and scaling production, which may surpass the risk tolerance and liquidity preferences of traditional investors. The uncertainties associated with long development timelines, unpredictable return profiles, untested market acceptance, and the potential for adverse policy changes further increase the risk, making these companies less attractive to investors and harder to fund.
The capital-intensive nature of the work of these companies makes them more susceptible to fluctuations in funding cycles, creating obstacles to securing the necessary capital for proving product viability and scaling operations. Attracting private investment involves navigating the complexities of debt versus equity funding, requiring companies to carefully evaluate financial strategies. They must weigh the long-term viability and control implications of equity financing against the fixed obligations of debt financing, influenced by the company’s lifecycle stage, risk appetite and the type of investment.
These challenges underscore the need for strategic risk transfer mechanisms and innovative financing instruments that address these unique aspects, offering incentives for sustainable returns with reduced risk profiles.
Going forward, financial incentives and mechanisms such as blended finance and patient capital are essential for supporting and mobilising private investment. Blended finance tools, such as concessional loans, guarantees, first-loss capital, subordinated debt, performance-based incentives, and advisory and technical assistance, offer strategic ways to commercialise and de-risk early-stage and non-traditional sectors, enabling their scalability. By bridging funding gaps in partnership with public, private, development finance institutions (DFIs) and philanthropic capital, blended finance is pivotal for ensuring that impactful innovations receive the necessary support, regardless of their development stage.
This approach is particularly critical for technologies with longer gestation periods, where traditional funding mechanisms may not suffice. The ability of blended finance to integrate grants, equity and debt creates a robust framework for sustaining climate projects throughout their lifecycle. DFIs play a crucial role in supporting riskier or unconventional sectors by offering grants and technical assistance from their global portfolios, thus aiding ongoing research and development, and pilot projects, while enhancing the viability of these sectors.
Going forward, the importance of government policy in bridging the financing gap cannot be overstated. Clear, long-term policy signals and regulatory certainty can help mitigate the perceived risks of green investments, making the transition more affordable and appealing to investors. By creating a supportive environment through policies and incentives, India can attract both global and domestic capital to fund its ambitious green transition.
The government can further support this effort by facilitating public-private partnerships (PPPs), particularly in sectors and technologies where investors might be wary due to uncertainties and delayed returns. PPPs can provide private investors with the assurance they need, encouraging private capital to flow into underfunded sectors and creating mutually beneficial outcomes for all stakeholders.
