Bridging the Green Finance Gap: Overcoming Investment Barriers in Emerging Markets
Bridging the green finance gap in emerging markets requires a multifaceted approach that addresses financial, policy, and infrastructure challenges. Strengthening regulatory frameworks, enhancing investor confidence, and leveraging international financial institutions are crucial steps toward overcoming investment barriers.
June 04, 2025. By News Bureau
Green finance encompasses financial activities that support environmental sustainability, including investments in renewable energy, energy efficiency, and climate resilience projects. The global green finance market is witnessing rapid growth, with various nations adopting green financial instruments to align economic development with sustainability goals.
India’s Green Finance Landscape: Policies, Initiatives, and Market Growth
India has implemented several green finance initiatives, including its commitment to achieving net-zero emissions by 2070. To help India's shift to a green economy, improve climate risk management, and encourage sustainable financial practices, the Reserve Bank of India has joined the Network for Greening the Financial System (NGFS), to create green finance policies, encourage sustainable investments, incorporate climate-related risks into financial stability monitoring, and advance the decarbonisation of economic systems. NGFS influences central banks and financial regulators to integrate climate risks into financial policies, enabling banks and investors to channel funds into sustainable projects through green bonds, risk assessments, regulatory incentives, etc. Other key measures include the Framework for Green Deposits (ensures funds are allocated to sustainable projects per RBI guidelines), Priority Sector Lending for Renewable Energy, and Green Monetary Policy.
India's green bond market has seen rapid growth, driven by the increasing need for sustainable financing. The Sovereign Green Bonds, introduced by the Government of India, are issued to fund public-sector projects that align with environmental objectives, such as renewable energy, clean transportation, and climate-resilient infrastructure.
The Securities and Exchange Board of India (SEBI) Green Bonds Framework provides guidelines for companies issuing corporate green bonds, ensuring transparency in fund utilisation for environmentally sustainable projects. Prominent corporate issuers include NTPC, ReNew Power, and Adani Power, which have raised funds for renewable energy, energy efficiency, and low-carbon projects.
Major financial institutions such as State Bank of India, Yes Bank, HDFC, and EXIM Bank are incorporating sustainable banking practices, including green financing, ESG-linked loans, and climate risk assessment in lending portfolios. India has also strengthened ESG regulations through mandatory Business Responsibility and Sustainability Reports.
Global Green Finance Trends: Key Players and Policies
Other countries have also made significant strides in green finance. Institutions such as the People's Bank of China and the European Central Bank are integrating climate concerns into monetary policies on a global scale. Green monetary policy can assist in funding the shift to a low-carbon economy, but it must strike a balance between financial stability, inflation management, and environmental objectives. Norway has prioritised ESG integration in investment decision-making, while the US has implemented the Inflation Reduction Act to promote green investments. A growing emphasis on innovative financing solutions, including artificial intelligence in decarbonisation efforts, is shaping global trends in sustainable finance.
Financial Barriers: Challenges Hindering Green Investments in Emerging Markets
Despite progress in green finance, several financial barriers hinder investments in emerging markets. Green financing often comes in the form of loans, increasing debt burdens for countries with limited fiscal space. Developing nations face severe constraints in addressing climate challenges due to inadequate financial resources and complex application procedures that discourage potential investors.
A major obstacle is currency risk, particularly in renewable energy projects, which require high upfront capital, have long lifespans, and generate local currency revenues while servicing hard currency debt. High capital costs and long payback periods make green projects less attractive than fossil fuel investments, deterring private sector participation. Investors’ concerns over fluctuating revenue streams, market volatility, and policy risks further affect financial stability. Additionally, the absence of strong credit guarantees and risk-sharing mechanisms limits private sector involvement.
The lack of high-quality carbon offsets undermines investment confidence by increasing credibility concerns and exposing investors to greenwashing risks. Regulatory uncertainty due to unstandardised verification adds to financial risks. Addressing these hurdles requires targeted interventions such as risk mitigation mechanisms and blended finance strategies.
Regulatory and Policy Hurdles: The Need for Stronger Frameworks
Uncertain policy frameworks create significant barriers for green investments in emerging economies. The absence of clear incentives for sustainable projects discourages businesses and financial institutions from engaging in green finance. Weak enforcement of environmental and energy laws further exacerbates investment risks, making it difficult for investors to navigate the regulatory landscape.
Bureaucratic delays and underdeveloped financial systems limit the mobilisation and efficient allocation of capital. Additionally, the lack of standardised definitions, metrics, and reporting requirements for green investments poses challenges for investors and project developers. Establishing consistent regulatory frameworks and offering fiscal incentives can help create a more stable environment for green finance.
Infrastructure Challenges: Overcoming Bottlenecks in Green Finance Implementation
Infrastructure bottlenecks significantly impact the success of green finance initiatives in emerging markets. Many emerging economies remain heavily dependent on fossil fuels due to the absence of well-defined policy frameworks supporting the transition to clean energy. Additionally, giving priority to putting methods in place for measuring and disclosing these risks, encourages financial institutions to disclose them openly, and fortify systems for forecasting and assessing them. By phasing out energy subsidies, creating new instruments and markets (like carbon pricing systems), and offering incentives and market mechanisms, governments can play a significant role in promoting green finance in the medium term.
The Role of International Financial Institutions: Bridging the Investment Gap
International financial institutions play a pivotal role in supporting green finance initiatives in emerging markets. Organisations such as the Asian Development Bank, World Bank, and International Monetary Fund provide financial and technical assistance to facilitate sustainable investments through funding and grants, risk mitigation by offering loan guarantees, insurance, credit enhancement mechanisms, and policy advocacy.
Blended finance and risk mitigation mechanisms can enhance investor confidence in green projects. Governments and multilateral institutions can offer concessional capital, such as low-interest loans and grants, to reduce financial risks for private investors. Public-private partnerships enable collaborative investments in renewable energy, green infrastructure, and climate adaptation projects, which can also help de-risk investments by distributing financial burdens across multiple stakeholders.
Impact bonds and green bonds are emerging as innovative financial instruments where returns are linked to environmental and social performance indicators. The Just Energy Transition Partnership (JETP) in South Africa serves as an example of how blended finance can support the phase-out of coal while ensuring economic stability.
Carbon markets and emissions trading systems are gaining traction in emerging economies, providing financial incentives to reduce greenhouse gas emissions. Article 6 of the Paris Agreement supports international cooperation in achieving climate goals through both market-based mechanisms and non-market approaches. Article 6.2 facilitates the trade of Internationally Transferred Mitigation Outcomes (ITMOs) through bilateral or multilateral agreements, ensuring transparency and efficiency. Article 6.4 establishes a Global Carbon Market, allowing public and private entities to buy and sell emissions reductions while directing a share of proceeds toward adaptation efforts in developing nations. Beyond carbon trading, Article 6.8 promotes non-market approaches such as technology transfer, finance, and capacity building, fostering sustainable development and climate resilience. All these have a direct bearing on the ability of local entrepreneurs to raise finance or reduce the cost of delivering green projects that help in CO2 reduction.
Innovative Financing Solutions: Unlocking Capital for Sustainable Projects
Several innovative financing mechanisms can help overcome the challenges associated with green investments in emerging economies. Green bonds are fixed-income financial instruments designed to fund projects with positive environmental impacts. Sustainability-linked loans and impact investing provide additional avenues for financing climate-friendly initiatives. Retail investors can now access sustainable assets thanks to tokenisation, which enables fractional ownership of carbon credits, solar farms, wind projects, and green bonds.
Government guarantees and risk-sharing mechanisms provide additional support by lowering capital costs and mitigating risks for private investors. Governments can also introduce tax credits and preferential lending rates to encourage green investments. Such measures can significantly enhance the attractiveness of green investments, fostering a more sustainable financial ecosystem.
Technology and Digital Finance: Transforming Green Investment Access
Fintech and digital funding platforms are playing a growing role in improving access to green finance, by making it more accessible, efficient and transparent. Through the use of digital solutions to draw in private investments, democratised finance, and lower transaction costs, these technologies aid in closing the funding gap for sustainable projects, particularly in emerging markets. Decentralised finance (DeFi) solutions offer alternative funding mechanisms, reducing dependency on traditional financial institutions, and offering direct peer-to-peer funding. It also creates a more transparent and inclusive financial solution.
The Way Ahead
Bridging the green finance gap in emerging markets requires a multifaceted approach that addresses financial, policy, and infrastructure challenges. Strengthening regulatory frameworks, enhancing investor confidence, and leveraging international financial institutions are crucial steps toward overcoming investment barriers. By adopting innovative financing mechanisms and fostering public-private partnerships, emerging economies can accelerate their transition to a sustainable future. With concerted efforts from governments, financial institutions, and investors, green finance can play a transformative role in building a resilient and environmentally sustainable global economy.
India’s Green Finance Landscape: Policies, Initiatives, and Market Growth
India has implemented several green finance initiatives, including its commitment to achieving net-zero emissions by 2070. To help India's shift to a green economy, improve climate risk management, and encourage sustainable financial practices, the Reserve Bank of India has joined the Network for Greening the Financial System (NGFS), to create green finance policies, encourage sustainable investments, incorporate climate-related risks into financial stability monitoring, and advance the decarbonisation of economic systems. NGFS influences central banks and financial regulators to integrate climate risks into financial policies, enabling banks and investors to channel funds into sustainable projects through green bonds, risk assessments, regulatory incentives, etc. Other key measures include the Framework for Green Deposits (ensures funds are allocated to sustainable projects per RBI guidelines), Priority Sector Lending for Renewable Energy, and Green Monetary Policy.
India's green bond market has seen rapid growth, driven by the increasing need for sustainable financing. The Sovereign Green Bonds, introduced by the Government of India, are issued to fund public-sector projects that align with environmental objectives, such as renewable energy, clean transportation, and climate-resilient infrastructure.
The Securities and Exchange Board of India (SEBI) Green Bonds Framework provides guidelines for companies issuing corporate green bonds, ensuring transparency in fund utilisation for environmentally sustainable projects. Prominent corporate issuers include NTPC, ReNew Power, and Adani Power, which have raised funds for renewable energy, energy efficiency, and low-carbon projects.
Major financial institutions such as State Bank of India, Yes Bank, HDFC, and EXIM Bank are incorporating sustainable banking practices, including green financing, ESG-linked loans, and climate risk assessment in lending portfolios. India has also strengthened ESG regulations through mandatory Business Responsibility and Sustainability Reports.
Global Green Finance Trends: Key Players and Policies
Other countries have also made significant strides in green finance. Institutions such as the People's Bank of China and the European Central Bank are integrating climate concerns into monetary policies on a global scale. Green monetary policy can assist in funding the shift to a low-carbon economy, but it must strike a balance between financial stability, inflation management, and environmental objectives. Norway has prioritised ESG integration in investment decision-making, while the US has implemented the Inflation Reduction Act to promote green investments. A growing emphasis on innovative financing solutions, including artificial intelligence in decarbonisation efforts, is shaping global trends in sustainable finance.
Financial Barriers: Challenges Hindering Green Investments in Emerging Markets
Despite progress in green finance, several financial barriers hinder investments in emerging markets. Green financing often comes in the form of loans, increasing debt burdens for countries with limited fiscal space. Developing nations face severe constraints in addressing climate challenges due to inadequate financial resources and complex application procedures that discourage potential investors.
A major obstacle is currency risk, particularly in renewable energy projects, which require high upfront capital, have long lifespans, and generate local currency revenues while servicing hard currency debt. High capital costs and long payback periods make green projects less attractive than fossil fuel investments, deterring private sector participation. Investors’ concerns over fluctuating revenue streams, market volatility, and policy risks further affect financial stability. Additionally, the absence of strong credit guarantees and risk-sharing mechanisms limits private sector involvement.
The lack of high-quality carbon offsets undermines investment confidence by increasing credibility concerns and exposing investors to greenwashing risks. Regulatory uncertainty due to unstandardised verification adds to financial risks. Addressing these hurdles requires targeted interventions such as risk mitigation mechanisms and blended finance strategies.
Regulatory and Policy Hurdles: The Need for Stronger Frameworks
Uncertain policy frameworks create significant barriers for green investments in emerging economies. The absence of clear incentives for sustainable projects discourages businesses and financial institutions from engaging in green finance. Weak enforcement of environmental and energy laws further exacerbates investment risks, making it difficult for investors to navigate the regulatory landscape.
Bureaucratic delays and underdeveloped financial systems limit the mobilisation and efficient allocation of capital. Additionally, the lack of standardised definitions, metrics, and reporting requirements for green investments poses challenges for investors and project developers. Establishing consistent regulatory frameworks and offering fiscal incentives can help create a more stable environment for green finance.
Infrastructure Challenges: Overcoming Bottlenecks in Green Finance Implementation
Infrastructure bottlenecks significantly impact the success of green finance initiatives in emerging markets. Many emerging economies remain heavily dependent on fossil fuels due to the absence of well-defined policy frameworks supporting the transition to clean energy. Additionally, giving priority to putting methods in place for measuring and disclosing these risks, encourages financial institutions to disclose them openly, and fortify systems for forecasting and assessing them. By phasing out energy subsidies, creating new instruments and markets (like carbon pricing systems), and offering incentives and market mechanisms, governments can play a significant role in promoting green finance in the medium term.
The Role of International Financial Institutions: Bridging the Investment Gap
International financial institutions play a pivotal role in supporting green finance initiatives in emerging markets. Organisations such as the Asian Development Bank, World Bank, and International Monetary Fund provide financial and technical assistance to facilitate sustainable investments through funding and grants, risk mitigation by offering loan guarantees, insurance, credit enhancement mechanisms, and policy advocacy.
Blended finance and risk mitigation mechanisms can enhance investor confidence in green projects. Governments and multilateral institutions can offer concessional capital, such as low-interest loans and grants, to reduce financial risks for private investors. Public-private partnerships enable collaborative investments in renewable energy, green infrastructure, and climate adaptation projects, which can also help de-risk investments by distributing financial burdens across multiple stakeholders.
Impact bonds and green bonds are emerging as innovative financial instruments where returns are linked to environmental and social performance indicators. The Just Energy Transition Partnership (JETP) in South Africa serves as an example of how blended finance can support the phase-out of coal while ensuring economic stability.
Carbon markets and emissions trading systems are gaining traction in emerging economies, providing financial incentives to reduce greenhouse gas emissions. Article 6 of the Paris Agreement supports international cooperation in achieving climate goals through both market-based mechanisms and non-market approaches. Article 6.2 facilitates the trade of Internationally Transferred Mitigation Outcomes (ITMOs) through bilateral or multilateral agreements, ensuring transparency and efficiency. Article 6.4 establishes a Global Carbon Market, allowing public and private entities to buy and sell emissions reductions while directing a share of proceeds toward adaptation efforts in developing nations. Beyond carbon trading, Article 6.8 promotes non-market approaches such as technology transfer, finance, and capacity building, fostering sustainable development and climate resilience. All these have a direct bearing on the ability of local entrepreneurs to raise finance or reduce the cost of delivering green projects that help in CO2 reduction.
Innovative Financing Solutions: Unlocking Capital for Sustainable Projects
Several innovative financing mechanisms can help overcome the challenges associated with green investments in emerging economies. Green bonds are fixed-income financial instruments designed to fund projects with positive environmental impacts. Sustainability-linked loans and impact investing provide additional avenues for financing climate-friendly initiatives. Retail investors can now access sustainable assets thanks to tokenisation, which enables fractional ownership of carbon credits, solar farms, wind projects, and green bonds.
Government guarantees and risk-sharing mechanisms provide additional support by lowering capital costs and mitigating risks for private investors. Governments can also introduce tax credits and preferential lending rates to encourage green investments. Such measures can significantly enhance the attractiveness of green investments, fostering a more sustainable financial ecosystem.
Technology and Digital Finance: Transforming Green Investment Access
Fintech and digital funding platforms are playing a growing role in improving access to green finance, by making it more accessible, efficient and transparent. Through the use of digital solutions to draw in private investments, democratised finance, and lower transaction costs, these technologies aid in closing the funding gap for sustainable projects, particularly in emerging markets. Decentralised finance (DeFi) solutions offer alternative funding mechanisms, reducing dependency on traditional financial institutions, and offering direct peer-to-peer funding. It also creates a more transparent and inclusive financial solution.
The Way Ahead
Bridging the green finance gap in emerging markets requires a multifaceted approach that addresses financial, policy, and infrastructure challenges. Strengthening regulatory frameworks, enhancing investor confidence, and leveraging international financial institutions are crucial steps toward overcoming investment barriers. By adopting innovative financing mechanisms and fostering public-private partnerships, emerging economies can accelerate their transition to a sustainable future. With concerted efforts from governments, financial institutions, and investors, green finance can play a transformative role in building a resilient and environmentally sustainable global economy.
- Ashwin Raikar, Managing Director, Nauvata Energy Transition (NET) Enterprise Pvt. Ltd.
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