Funding India’s Energy Transition: Why Green Capital Must Scale Faster

India does not lack capital intent, it needs speed, standardisation, and risk-mitigation mechanisms. Acting decisively on these levers can unlock the next phase of green financing growth which would enable a developed, inclusive, and “climate-just transition” for the country by 2047.

February 03, 2026. By News Bureau

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Sanchit Makhija

Kearney

India’s Energy Transition

Green capital

Green financing growth

Electric Vehicles

Biofuels

National green taxonomy

Green NBFCs

Mainstream credit assessment

Green economy

Climate-just transition

India stands at a cusp of energy transition- the last decade has had phenomenal ~3x growth in conventional solar & wind projects while new emerging areas of green hydrogen, electric vehicles, biofuels, pumped and battery storage have entered into mainstream conversations. Going forward, for meeting strategic objectives of energy independence, sustainability of emissions & cost effectiveness of energy, it is critical for India to accelerate this momentum even further over coming decade. This in turn implies an investment cycle of unprecedented scale and persistence. As per Kearney’s estimations, India requires INR 30 lakh crores of green financing over coming 5-7 years with 50 percent of this capital committed towards new emerging areas.

However, the financing system that must power this transition is still evolving- products are expanding, institutions are learning to price climate and technology risk, and regulators are rebuilding the rulebook. Currently, an estimated green financing gap of INR 15-18 lakh crore is expected to build over the coming 5-7 years (60 percent of requirement). This gap is largely due to-

Currency and foreign capital constraints- India needs larger pools of long-term capital, including global investors, but FX hedging costs and policy frictions can reduce appetite— further heightening the need for domestic market depth.
Reluctance in funding emerging sectors where large upfront capital requirement, long development cycles, evolving technologies, limited offtake guarantees and demand uncertainty increase the perceived risks for financiers.
Cost of capital and tenor mismatch- Emerging assets need long-tenor debt; liabilities often remain shorter. New areas to mitigate this challenge via refinancing, securitisation, guarantees, and blended finance require enabling frameworks and deep debt markets.
Project execution and counterparty risk- Land acquisition, permits, grid connectivity, Environment & Safeguard clearances can delay cash flows and complicate risk models—making credit enhancement and structured covenants more important.
Data and measurement transparency- Without standardised, auditable reporting, green assets face higher due diligence costs and valuation haircuts. Taxonomy and disclosure reforms should reduce this over time, but implementation capacity will be decisive.

We believe the opportunity for green financing is immense but so are the frictions for addressal. Multiple stakeholders in green financing (Government and public institutions, multilateral and bilateral institutions, domestic financial institutions- NBFCs/ banks/IDFs, capital markets, PE investors, project developers, carbon and climate market participants) would have to play a constructive role for India to accelerate the green journey by tapping this opportunity. We believe 5 key areas of focus for the country exist-

1. Finalise and operationalise a national green taxonomy

India should move quickly from draft to implementation on its climate finance taxonomy. A clear, legally recognised classification of “green” and “transition” activities will reduce ambiguity, curb greenwashing, and give lenders and investors confidence in asset quality. Immediate alignment with global standards (EU, ASEAN, ISSB) will also lower due-diligence costs for international capital. India has started moving in this direction-: the Ministry of Finance released a draft framework for a Climate Finance Taxonomy (May 2025) to help classify activities aligned with climate goals and improve transparency. The RBI has also emphasised the need for enablers like a national taxonomy, globally aligned disclosure standards, and robust assurance and verification—explicitly calling out greenwashing risks.

2. Scale specialised green NBFCs and co-lending platforms

India should actively use specialised NBFCs as system enablers. Strengthening balance sheets, enabling take-out financing, and accelerating co-financing between banks and green NBFCs can accelerate funding to rooftop solar, GH2, Merchant battery projects, MSMEs, energy efficiency, and decentralised assets—segments that traditional banking alone struggles to serve.

3. Integrate climate risk into mainstream credit assessment

Climate risk should become a standard input in lending and investment decisions—not a separate ESG exercise. Regulators can nudge this by issuing guidance on physical and transition risk assessment, stress testing, and disclosure. This will improve pricing discipline and prevent future asset-quality shocks in carbon-intensive and climate-exposed sectors.

4. Lower the cost of long-tenor green capital

Expanding tax-efficient instruments (such as Section 54EC-type bonds), credit guarantees, First loss guarantees, Risk guarantee mechanisms, Revolving fund mechanisms and blended-finance vehicles/ thematic bonds (GH2/ offtake export bonds etc.)—especially routed through institutions like IREDA, PFC and Global Climate funds, can materially reduce weighted average cost of capital for emerging sectors.

5. Skilling professionals for a Green Economy

Skilling professionals for a green economy is critical to unlocking capital effectively. There is a growing need for professionals who understand climate risk, carbon metrics, ESG regulations, and the financial implications of decarbonisation. Building these skills enables better project evaluation, risk pricing, and capital allocation toward viable green initiatives, ensuring that financial markets actively support the transition to a low-carbon, sustainable economy.

In conclusion, India does not lack capital intent, it needs speed, standardisation, and risk-mitigation mechanisms. Acting decisively on these five levers can unlock the next phase of green financing growth which would enable a developed, inclusive, and “climate-just transition” for the country by 2047.

- Sanchit Makhija, Partner at Kearney