This is our series’ third and final blog on “Transforming India’s Climate Finance Landscape through Sector-Specific Financial Institutions.” The previous blogs examined the critical role of power sector-focused financing institutions, specifically Power Finance Corporation (PFC) and REC Limited (REC), in facilitating India’s Energy transition and analyzed related financing opportunities and risks.

Recognizing the growing need for targeted financial solutions, this blog explores the Green and Transition Finance (GTF) Window for PFC and REC to improve sustainable finance flows.

With economies around the world moving towards sustainability, green and transition finance have emerged as key pillars of sustainability-focused finance. While these two terms are interrelated, they often serve distinct purposes. Green finance focuses exclusively on near-zero or zero-emission initiatives that align with the Paris Agreement. It ensures progress toward a sustainable economy by funding clean energy projects, sustainable transport, and climate-resilient infrastructure.

On the other hand, transition finance acts as a bridge for industries and sectors that are not yet fully green but need support to reduce emissions. The idea is to ensure that perfect doesn’t become the enemy of the good. This is particularly relevant for hard-to-abate sectors such as steel, cement, chemicals, and energy-intensive industries. While these industries may not qualify for green finance today, their transformation is crucial for achieving net-zero emissions in the long run. Together, green and transition finance create a comprehensive pathway toward decarbonization.

Green and Transition Finance Landscape

While India has made significant strides in green financing, the flow is below desired levels. According to Environmental Finance Data, global green finance markets were valued at USD 4.2 trillion in 2024. Meanwhile, India’s green finance flow stood at USD 50 billion in 2021-22, as per CPI’s Landscape of Green Finance in India report – covering only 30% of the required investment to meet the country’s NDC goals.

Similarly, Global transition finance stood at USD 3.5 trillion in 2024. The limited finance available flows more towards green finance vis-à-vis transition finance. For example, clean energy projects account for 47% of all climate finance, followed by energy efficiency at 35% and clean transport at 18% in the country. In contrast, transition activities—such as the flexibilization of thermal power plants and the adoption of transition technologies—have struggled to attract investment due to a lack of dedicated transition financing mechanisms.

Green and Transition Finance (GTF) Window

PFC and REC are at the center of India’s power sector financing, with a collective portfolio of over INR 9 trillion (USD 106 billion)[1] having played a key role in funding power generation, transmission, and distribution. However, with India’s ambitious decarbonization targets, their mandate is being stretched to include non-power infrastructure, including heavy manufacturing, transport, and energy-intensive industries. By broadening their portfolios, PFC and REC can leverage their domain expertise to create bespoke financial products that address sectoral challenges in green and transition financing.

A dedicated Green and Transition Finance Window (GTF Window) in PFC and REC would enable a structured manner of financing emissions reduction projects and the uptake of pre-commercial green alternatives. This window would be a ring-fenced pool of funds under the management of an experienced team to enable targeted financing of projects that cannot access private financing due to perceived risks. By mobilizing private capital, the GTF Window would enhance India’s ability to deliver on its net-zero commitments while reaffirming PFC and REC’s leadership in the green transition space.

The introduction of the GTF Window would tackle significant financial barriers that currently limit the growth of transition finance. While clean energy projects receive sizable investments, the flexibilization of thermal power plants, industrial retrofits, and the introduction of transition technologies have not secured finance. By providing dedicated funds to green and transition projects, the GTF Window can fill this gap and render climate finance more balanced. Given the range of sectors and projects, one financing model would not be possible. Instead, an iterative process will be necessary to evolve financing structures based on sectoral problems and emerging opportunities.

Value Proposition of GTF Window

One of the important advantages of the GTF Window would be that it would help attract international capital. Foreign investors perceive Indian markets as risky due to policy uncertainty and financial barriers. However, backed by the financial strength of REC and PFC and a clear use-of-funds framework that boosts transparency and investor confidence, the GTF Window can enable India to be a viable destination for climate finance. Leveraging investment-friendly instruments, such as the ones offered by the IFSC regime at GIFT City, this platform can bring in cross-border investments in transition and green projects in India.

The GTF Window would play a critical role in the market’s development by aggregating smaller projects, facilitating risk-return enhancements, and releasing commercial viability for new technologies. Some of the areas that could be beneficially targeted with funding include carbon capture, flex fuels, grid-supporting projects, green hydrogen, battery storage, and industrial decarbonization. A phased approach would be ideal, with an initial focus on smaller players such as SMEs and local infrastructure projects to test financing models before scaling up larger investments.

The lack of a bankable project pipeline is a key bottleneck to scaling green and transition finance. The GTF Window, under its ambit, can also consider creating a pipeline facility by developing and aggregating viable projects, providing technical assistance, and structuring support to reach financial closure. Prioritize infrastructure projects with clear revenue models and assess their broader economic and social benefits, such as employment creation and community benefits, to strengthen investor confidence and scalability.

The GTF Window could help overcome market limitations through market development services. Limited access to information on viable investment opportunities, financial structures, and available technology tends to deter capital inflow into transition sectors. The GTF Window would provide technical assistance, risk assessment, and financial advisory services by bridging such gaps, ensuring an open and well-informed market situation. These operations would indeed catalyze the inflow of capital into underfinanced yet critical transition sectors.

Financial Products & Mechanisms

PFC and REC could raise finance through the GTF window using financial instruments such as green bonds, transition bonds, and sustainability-linked financial instruments. Collaboration with multilateral development banks (MDBs), sovereign funds, and impact investors could help de-risk projects and mobilize blended finance solutions.

While PFC and REC could use existing instruments to raise green and transition finance, they can also explore new financing instruments to enhance capital mobilization. One such approach is using credit enhancement tools such as loan guarantees to mobilize private capital at competitive rates by enhancing the risk-return profile of projects. Another option is co-financing models, where PFC and REC provide senior or subordinated debt, allowing for better risk allocation and encouraging participation from private lenders. Additionally, warehousing and securitization structures can be employed to facilitate capital recycling, thereby scaling up financing for distributed decarbonization technologies. Asset-based financing is another potential mechanism where loans could be collateralized against physical green infrastructure, reducing perceived project-related risks and enhancing the flow of capital.

Measuring Success

Gauging GTF Window’s success would be required to track progress and refine financing models over time. Metrics include the volume of capital mobilized, the degree of low-carbon capacity added, and the broader socioeconomic benefits generated. Greenhouse gas (GHG) emissions avoided, jobs created, and increased regulatory certainty would define the initiative’s impact. Clarifying revenue models and ensuring a steady policy environment would also enhance investor confidence and long-term viability.

Way Forward

Rather than competing approaches, green and transition finance are complementary concepts, working together to accelerate decarbonization. A robust green and transition finance ecosystem is critical as India proceeds toward attaining its net-zero target by 2070. Institutional players like PFC and REC can now set themselves up to become more than traditional lenders and become enablers of strategic investments with an eye on India’s 2070 commitments. This aligns very much with their role as institutions of strategic importance for the nation. As conceptualized, the Green and Transition Finance Window would serve as a facilitator for unlocking global capital, derisking key decarbonization projects, and ensuring an equitable and inclusive transition. This wraps up our series on green and transition finance, highlighting the pivotal role of financial institutions in accelerating India’s clean energy transition.

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[1] 1 USD = 85 INR