India’s climate finance challenge is matching capital with the right risks

Climate finance is usually discussed in terms of shortage of money required for adaptation or mitigation measures in developing countries as the world warms. But it requires a deeper, more technical look. 

For example, India’s transition requires ironing out multiple wrinkles: matching different forms of capital with the risks they are actually equipped to carry.

Let’s consider three climate investments:  mature solar project with predictable revenues may be able to borrow commercially; a green hydrogen project facing uncertain demand and technology risks may need concessional capital or a guarantee; and a city investing in flood protection may generate enormous economic benefits, but no direct revenue stream capable of repaying a commercial loan.

All three require climate finance, but not necessarily  the same  form.This distinction is becoming increasingly important as the climate-finance debate moves from mobilisation towards implementation as the world heads into the annual climate conference COP31 to be held in Antalya, Türkiye.

The recently concluded BRICS Summit in India offers one indication of this shift. The New Delhi Declaration did not speak only about increasing financing volumes. It highlighted adaptation funding gaps, debt constraints, guarantees, local-currency finance and the role of financial institutions. BRICS leaders also backed further development of the Multilateral Guarantees initiative and encouraged the New Development Bank to expand local-currency financing.

The timing matters. Like the previous COP held in Brazil, COP31 is being explicitly framed by its Presidency as an ‘Implementation COP’, with a focus on translating commitments into tangible and trackable progress. 

Climate finance is among its stated priority areas.If implementation is now the test, the climate-finance conversation needs to become much more granular.

Different capital for different needs

Climate-finance debates often aggregate grants, concessional loans, guarantees, commercial lending and institutional investment into one large financing requirement.Yet each instrument performs a different function.

Commercial capital works best where risks are reasonably understood and cash flows are predictable. Mature renewable-energy projects increasingly fall within this category.

Concessional capital is more valuable where markets are unwilling to absorb early-stage risks. New technologies, first-of-a-kind industrial decarbonisation projects and emerging business models may need cheaper or longer-tenor capital (where repayments can be made past five years) before they can attract mainstream lenders.

Guarantees address a different problem. A project may be economically viable but still struggle to secure financing because of one identifiable risk, such as weak offtake, low creditworthiness or uncertainty over long repayment periods. In such cases, absorbing or sharing that particular risk may be more effective than providing another subsidised loan.

Adaptation introduces an even harder question.Flood-control systems, heat-resilient urban infrastructure, water security and community resilience can generate substantial public benefits without producing a conventional project revenue stream. Trying to force all such investments into commercial financing structures risks confusing “bankability” of such projects with their social value.

Public budgets, grants and highly concessional finance will therefore remain central to many adaptation investments.

The allocation of climate finance should follow the characteristics of the investment, rather than expecting every climate investment to conform to the same financial model.

India needs intermediation, not only mobilisation

This is particularly relevant for India because much of its transition will ultimately be financed domestically.

Banks, non-banking financial institutions, development finance institutions, bond markets and institutional investors will determine whether capital reaches clean-energy projects, industries, MSMEs, mobility systems and climate-resilient infrastructure.

Recent research by the Chintan Research Foundation points to a recurring problem: available capital does not automatically translate into investible projects.

Cost of capital, loan tenor, project size, risk and the ability of financial institutions to evaluate emerging sectors all shape financing decisions.

The challenge is therefore not simply to bring more money into the system. It is to create mechanisms through which different pools of money can move towards investments with different risk profiles.

This is where international climate finance can have greater catalytic value.

Instead of replacing domestic capital, development finance can help domestic financial institutions absorb risks they cannot initially carry. Guarantees can strengthen project credit profiles. Concessional capital can support early-stage investments. Refinancing facilities can free bank balance sheets once projects become operational.

The objective should eventually be to move mature assets towards commercial lenders and institutional investors, allowing scarce development capital to be reused elsewhere.

Climate finance then becomes a process of risk migration rather than permanent subsidy.

Currency matters

The BRICS emphasis on local-currency finance is relevant to this discussion. An Indian climate project may generate revenues in rupees while borrowing in dollars. That creates a currency mismatch. Foreign capital that initially appears cheaper can become much more expensive once exchange-rate risk or hedging costs are incorporated.

Expanding domestic-currency financing can reduce this mismatch. The BRICS declaration specifically encourages the New Development Bank to expand its local-currency financing and diversify its funding sources.

But local-currency finance is not automatically affordable finance.

Domestic interest rates, long project tenors and sectoral risks remain. The more useful question is therefore how institutions such as the NDB can combine local-currency lending with guarantees, refinancing and other risk-sharing mechanisms that help mobilise larger pools of domestic capital.

This is also why the proposed BRICS Multilateral Guarantees initiative deserves attention. The declaration identifies its potential to mobilise private capital, improve creditworthiness and reduce financing costs for projects in BRICS and other Global South economies.

Its value should ultimately be measured not only by the amount of guarantees issued, but by what those guarantees can change: whether borrowing costs fall, loan tenors increase, private investors enter and projects that previously could not secure finance become investible.

From $1.3 trillion to allocation

The Baku-to-Belém Roadmap provides the larger backdrop. It sets out pathways towards at least $1.3 trillion annually in external climate-finance flows to developing countries by 2035. The Roadmap itself recognises that mobilising this scale of finance requires action across public finance, multilateral development banks, private capital and the broader international financial architecture.

The scale remains critical. Developing economies cannot finance their transitions without a substantial increase in international support.But scale without allocation will leave another problem unresolved.

A billion dollars of commercial debt cannot substitute for grants where no revenue stream exists. Concessional finance adds limited value if it remains indefinitely tied to mature assets that markets can already finance. A guarantee will achieve little if the actual problem is an unviable business model.

COP31’s implementation agenda therefore needs to ask a more practical set of questions:

1. Which risks genuinely require public or concessional capital? 

2. Which risks can development institutions share? 

3. When should commercial lenders enter? 

4. How can successful assets eventually be refinanced so that scarce public resources can be recycled?

These questions may sound less dramatic than a new trillion-dollar financing target. But they will determine whether those trillions translate into projects.

The next phase of climate finance should therefore be about more than raising capital. It should be about building a financial system capable of sending the right capital to the right risk, at the right time.

For India, that may be the difference between having climate finance available and actually being able to use it.

Dr Ria Sinha is a Senior Fellow at Chintan Research Foundation. Views expressed are personal.

[Edit: Bhasker Tripathi, Shaswata Kundu Chaudhuri]