Why India Must Recognise Climate Investments as a Distinct Financing Category

India’s climate investment needs are massive, front‑loaded, and central to macro-financial stability. Unlike economies in the Global North that benefit from deep fiscal buffers and structurally strong external positions, India must navigate its transition with far tighter public finances. International funding from multi-laterals, bi-laterals and dedicated climate funds remains insufficient, placing the spotlight on domestic finance from banks, NBFCs, capital markets and domestic development financial institutions. Understanding why this transition remains under‑financed requires examining how ‘bankability’ is currently defined and why most climate‑critical investments fall outside lenders’ comfort zone.

Indian commercial lenders operate under rigorous regulatory mandates that prioritise conventional norms of creditworthiness, risk assessment, and fiduciary responsibility. Today, ‘bankability’ is judged primarily on historical performance, future cash flows, risk‑sharing structures and defined exit or refinancing pathways. In contrast, climate risks are non‑linear, heterogeneous and long-tailed, making them difficult for credit‑rating methodologies under Basel III framework to capture perfectly. Currently, lenders’ capital requirements remain tied to credit ratings through mapped risk weights.

Fixing ‘Non-Bankable’ Projects

Hence existing approaches can potentially obscure long‑term transition risks, particularly in carbon‑intensive sectors facing structural transformation. These frameworks work well for mature mitigation projects such as grid scale renewables or energy-efficiency upgrades where revenue benefits or cost savings are quantifiable. However, standalone climate adaptation and resilience projects whose value lies in avoided losses from climate risks, rather than direct revenue gains are structurally “non‑bankable”. A sizeable portion of India’s most urgent climate needs therefore sits outside the domain of commercial lenders.

Moreover, lenders rarely assign negative points for a project’s climate exposure, even when it increases long-term risks. Nor do they give credit to mitigation projects delivering positive climate outcomes. The solution is not to create a separate approval track for ‘green’ projects, but to embed climate considerations into the standard credit assessment such that every proposal, regardless of its ‘greenness’ faces incentives or penalties linked to climate impact.

While lenders have grown comfortable financing proven green assets, the next wave of decarbonisation will be led by modern day interventions such as green hydrogen, CCUS, advanced industrial electrification, biomass‑based fuels, and novel process‑integrated technologies etc., characterized by medium to high technology readiness levels or low integration readiness levels, uncertain cash flows, and limited demonstration data. Again, these characteristics make them hard to classify as bankable within conventional credit frameworks, even though they are indispensable for India’s net zero pathway. The financing gap is thus most acute where early stage, risk tolerant capital is required to enable scale-up and cost reduction leading to commercial viability.

Recalibration of Regulations

Addressing this gap requires a careful but courageous recalibration of regulations, institutional mandates, financial instruments, and inter‑agency coordination. India needs a commercial finance ecosystem that treats climate risk as financial risk and equips lenders to reflect the realities of a warming world. The Reserve Bank of India (RBI), as a member of the Network for Greening the Financial System (NGFS) has already acknowledged this imperative of climate induced risks to systemic stability. A lending architecture that integrates climate risks must therefore be calibrated and phased minimising disruption to market dynamics and competitiveness.

A solid foundation for this paradigm is reliable climate data. The RBI’s Reserve Bank Climate Risk Information System (RB‑CRIS) can become the backbone for standardised, science‑based climate‑risk measurement by providing common datasets on physical and transition risks. This will enable lenders to gradually integrate climate‑specific probability-of‑default (PD) and loss‑given‑default (LGD) metrics into appraisal methods.

From here, India should consider three policy steps. First, RBI may need to move beyond its implicit asset‑neutral stance and formally recognise climate investments as a distinct financing category. Second, RBI should create a dedicated tier of climate‑risk capital backed by a government‑anchored Climate Risk Fund to absorb early‑stage risks and crowd‑in domestic and international private investors. Banks and NBFCs must simultaneously be enabled to raise climate‑lending capital domestically and globally, supported by incentives such as tax breaks, temporary mark‑to‑market relief, or calibrated regulatory exemptions. Meanwhile, SEBI’s growing sustainable finance ecosystem can help channel capital through listed ESG and climate aligned instruments. Third, SEBI should complement this with a dedicated external climate rating system which is objective, sector-specific and anchored in RB-CRIS data to support climate adjusted risk-weighting. Parallelly, the Ministry of Finance’s forthcoming Climate Finance Taxonomy will establish clear criteria for credible climate investments and help curb greenwashing.

Finally, without disrupting the underlying Basel architecture, India must evolve toward a two‑dimensional risk‑weighting system. A practical model can retain the familiar credit‑rating ladder (AAA to D) while adding a 1-5 climate‑risk score (e.g., AAA/3 or BBB+/2). Risk weights would vary within existing Basel bands: a lower climate score implies higher capital requirements, and vice versa, embedding incentives for cleaner, climate-resilient investments.

In sum, embedding climate into India’s financial system requires coordinated evolution across regulators, commercial lenders, rating agencies and data institutions. The longer the delay in this shift, the higher the eventual adjustment costs for the financial system and the economy. India now has the opportunity and responsibility to emerge as a global thought‑and‑action leader in shaping how financial systems respond to the climate imperative

(Leena Nandan is Distinguished Fellow, while Sidharth Sinha is Senior Fellow at TERI. The views expressed are personal.)