Financing the Green Growth Transition

It is an accepted fact that our financial system does not account for nonfinancial metrics. Short-term value creation is allowing capital to go towards where it will drive the maximum return �� and in many cases it is towards sectors and value chains that don’t price in physical risks, externalities and adverse social impacts. Which is why, the world is awash with fast fashion, plastic packaging, polluted cities and mile high waste dumps.

But it isn’t all grim - Despite headwinds, the energy transition is well underway and corporate intent for change is also clearly visible in ESG reports. But all this is not making significant impact, or the impact is small and in pockets or not scaling fast enough. The reason is simple, markets enable transition at scale and unless the markets incentivise the green transition and price in ESG metrics - positive intent, corporate purpose, aggressive net zero targets and great ESG scores won’t make the cut.��

So, what should be done?

Because the challenge is systemic, the solutions must be too. To make India a nation that incentivises green growth we need to change markets by changing incentives. Finance therefore needs to be channelled to support the sustainability transition. We need to move beyond ESG reporting and push for structures that shift capital to where it will matter the most. A consistent regulatory focus on scaling up sustainable finance will be key to this shift. Last year the Reserve Bank of India has launched the draft guidelines for climate risk and opportunities assessment for banks. This represents a significant milestone in India’s journey towards climate resilience in the financial sector.

However, enabling finance for sustainability requires creating robust mechanisms that align capital with climate priorities. Climate finance is emerging as a critical enabler of global climate action, with developing nations needing at least $5 trillion in cumulative financing by 2030 to meet their climate goals.¹ Tools such as green taxonomies have been instrumental in directing investments to areas where they can make the most impactful difference, while avoiding the hazards of greenwashing. These taxonomies provide clarity for investors and stakeholders, offering standardised frameworks to identify sustainable investments. The Union Ministry of Finance's Department of Economic Affairs recently unveiled the draft Framework for India’s Climate Finance Taxonomy.

This taxonomy categorises key climate action areas into three pillars: mitigation, adaptation, and transitioning hard-to-abate sectors. It also specifies industries under these pillars, focusing on critical sectors such as power, mobility, buildings, agriculture, food and water security, and hard-to-abate sectors like cement, iron, and steel. By establishing rigorous standards and transparent practices, the taxonomy aims to ensure credibility and trust in climate financing. Such initiatives, if backed by robust policies and widespread adoption, can reshape markets to reward sustainability and channel resources toward meaningful climate solutions.

The taxonomy is a critical tool, but its just one of the many things that need to be done to enable transition at scale. India’s sustainable finance framework should rest upon two areas critical to driving systemic change.

The first entails a sector-specific and holistic green industrial strategy. Over the last year or so the Indian Government has accelerated the pace towards making a lot of this happen. Finalisation of the greenwashing guidelines, draft guidelines on climate risk for banks, emission reduction targets for aluminium, cement, Chlor-Alkali, and pulp & paper and ongoing work on the carbon markets has been initiated. These shifts are indications of a larger strategy that blends sustainability into core business structures. However, more action and deeper commitment is needed. Such forward-looking policies will signal clarity and confidence to the financial system, encouraging investments in sustainability transitions.

The second area focuses on a financial regulatory framework that leverages the full spectrum of tools available to central banks and financial regulators. This includes taxation, subsidies, financial regulations, and corporate governance mechanisms. Shifting markets requires synergistic moves in both financial regulation and wider policy targeting the real economy. At the same time safeguards are needed so that sustainability challenges do not undermine the stability of the financial system.

Finance runs the world, but by its very nature it can only price in the real economy and not create a new one unless enabled by policy. Given the momentum in Indian policy making, India has the unique opportunity to create financial markets that help enable the sustainability transition. By harnessing our unique strengths India can showcase what is possible and how we can scale. This can help us create a leadership position in developing financial models and structures that allow long term value creation in a dynamic, climate resilient world.
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A version of this article was published by Hindustan Times Online on June 11 2025. The same can be read