The International Financial Services Centres Authority (IFSCA) has released a pivotal report on Transition Finance, prepared by its Expert Committee on Climate Finance. This report addresses the urgent need for mobilizing substantial international financial resources to support India’s climate objectives, estimated at over USD 10 trillion by 2070. It emphasizes aligning financial flows with the Paris Agreement’s goals, focusing on sectors crucial for low-carbon transition. The recommendations span three pillars: defining Transition Finance, policy and regulatory frameworks, and financial instruments. The goal is to position IFSC-GIFT City as a global hub for climate finance, attracting international capital essential for India’s sustainable development.
The report underscores that while green finance has made strides, financing for hard-to-abate sectors remains inadequate. It advocates for “transition labelled instruments” to bridge this gap, highlighting the nascent stage and the lack of a universal framework. The committee’s recommendations include regulatory enhancements and innovative financial mechanisms to catalyze investments in challenging sectors like steel and cement, vital for India’s decarbonization efforts. By leveraging GIFT-IFSC’s international connectivity, the aim is to foster a robust ecosystem that supports India’s net-zero ambitions while promoting sustainable development regionally.
Overall, the IFSCA’s initiative seeks to not only address climate challenges but also to harness them as opportunities for green growth, ensuring a resilient and sustainable future for generations to come.
International Financial Services Centres Authority
Report on Transition Finance By Expert Committee on Climate Finance
Transition Finance
1. Abbreviations and Acronyms
| Abbreviations | Definition |
| ADB | Asian Development Bank |
| AIF | Alternate Investment Fund |
| ASEAN | Association of Southeast Asian Nations |
| AUM | Asset Under Management |
| BRSR | Business Responsibility and Sustainability Reporting |
| CBI | Climate Bond Initiative |
| CCFD | Carbon Contract for Difference |
| CCUS | Carbon Capture, Utilisation and Storage |
| CEEW | Council on Energy, Environment and Water |
| CEO | Chief Executive officer |
| CGM | credit guarantee mechanism |
| CGTSME | Credit Guarantee Fund Trust for Micro and Small Enterprises |
| CO2 | Carbon dioxide |
| CPI | Climate Policy Initiative |
| CSR | Corporate Social Responsibility |
| DBS | Development Bank of Singapore |
| DFI | Development Financial Institution |
| ECA | Export Credit Agencies |
| ECB | External Commercial Borrowings |
| EMDEs | Emerging Markets and Developing Economies |
| ESCO | Energy Service Company |
| ESG | Environmental, Social and Governance |
| EU | European Union |
| EY | Ernst and Young |
| FCDO | Foreign, Commonwealth & Development Office |
| FCRA | Foreign Contribution Regulation Act |
| FI | Financial Institutions |
| FLDG | First Loss Default Guarantee |
| GBP | British pound sterling |
| GCF | General Collateral Financing |
| GFANZ | Glasgow Financial Alliance for Net-Zero |
| GGEF | Green Growth Equity Fund |
| GHG | Greenhouse gases |
| GIFT | Gujrat International Financial Tech-city |
| GSS+ | Green, Social, Sustainable, Sustainability-linked and transition labelled |
| ICM | Indian Carbon Market |
| ICMA | International Capital Markets Association |
| IEA | International Energy Agency |
| IFC | International Finance Corporation |
| IFSC | International Financial services centres |
| IFSCA | International Financial services centres Authority |
| INR | Indian Rupee |
| IPCC | Intergovernmental Panel on Climate Change |
| IRDAI | Insurance Regulatory and Development Authority |
| IREDA | Indian Renewable Energy Development Agency |
| ISDA | International Swaps and Derivative Association |
| IT | Information Technology |
| JSW | Jindal Steel Works |
| KPI | Key Performance Indicators |
| LC | Letter of credit |
| LMA | Loan Market Association |
| MAS | Monetary Authority of Singapore |
| MD | Managing Directors |
| MDB | Multilateral development banks |
| MLI | Member lending institutions |
| MOEFCC | Ministry of Environment, Forest and Climate Change of India |
| MoF | Ministry of Finance |
| MW | Megawatt |
| NCGTC | National Credit Guarantee Trustee Company |
| NIIF | National Investment and Infrastructure Fund |
| NSE IFSC | National Stock Exchange- International Financial Service Centre |
| NZE | Net Zero Emissions |
| OECD | Organisation for Economic Cooperation and Development |
| PCG | Partial Credit Guarantee |
| PE | Private Equity |
| PPF | Project Preparatory Facility |
| PRI | Principles for Responsible Investment |
| PRSF | Partial Risk Sharing Facility |
| RBI | Reserve Bank of India |
| RD&D | Research, Development and Demonstration |
| RE | Renewable Energy |
| SDF | Steel Development Fund |
| SDGs | Sustainable Development Goals |
| SEBI | Securities and Exchange Board of India |
| SLB | Sustainability-Linked Bonds |
| SLD | Sustainability- Linked Derivative |
| SLL | Sustainability-linked Loans |
| SME | Small and Medium Enterprises |
| TA | Technical Assistance |
| TPI | Transition Pathway Initiative |
| TRL | Technology readiness level |
| TSC | Technical Screening Criteria |
| UK | United Kingdom |
| UN | United Nations |
| UNFCCC | United Nations Framework Convention on Climate Change |
| US | United States |
| USD | United States Dollar |
| USICEF | US-India Clean Energy Finance |
| VC | Venture capital |
| VGF | Viability Gap Funding |
| WTE | Waste to Energy |
2. Letter from Chair to Chairperson, IFSCA
India stands at a critical juncture with the challenging task of mobilizing climate finance estimated over USD 10 trillion by 2070 to achieve its net-zero ambitions and at the same time ensure economic growth and well-being of its citizens. Therefore, India needs to convert the challenge of low carbon/net zero transition into an opportunity for green growth.
As the world grapples with the climate crisis and recognizes the seriousness of the threat, there is an urgent need for coordinated action to mobilize substantial international financial resources for climate investments in India. IFSCA constituted an Expert Committee on Climate Finance with a focus on low carbon transition sector and activities and also for developing IFSC-GIFT City into a global climate hub for the region.
This report on Transition Finance with inputs from the Expert Committee is a timely and pivotal contribution which underscores the need for aligning financial flows with the objectives of the Paris Agreement and other global climate commitments. As we endeavour to limit global temperature rise to 1.5 degrees Celsius, the mobilization of transition finance becomes not just a strategic imperative but a moral responsibility and ensuring a sustainable future for generations to come.
The report captures the recommendations by the Expert Committee under its three pillars: 1. Scope and definition of Transition Finance, 2. Policy and Regulation, 3. Financial Mechanisms and Instruments. The report emphasizes the role of transition finance in driving investments towards hard-to-abate sectors which are crucial for economic growth, and facing technical and economic challenges in decarbonization. By exploring global best practices and regulatory landscapes, the report offers strategic recommendations by the Expert Committee to enhance the role of GIFT-IFSC as a conduit for attracting international capital, crucial not only for India’s climate objectives but also for furthering sustainable development in India and the region.
I commend the contributors for their comprehensive analysis and recommendations presented in this report. The Expert Committee hopes that this report serves as a catalyst for informed dialogue and drives action among policymakers, financial institutions, and stakeholders across the globe, as we collectively strive towards a resilient, low-carbon future.
Dr. Dhruba Purkayastha
Chairperson, Climate Finance Committee, IFSCA
Director, Council on Energy Environment and Water (CEEW)
01 July 2024
3. Committee Formation
As per the sixth assessment report from the Intergovernmental Panel on Climate Change (IPCC), climate change “has caused widespread adverse impacts and related losses and damages to nature and people,” and that projected “mid- and long-term impacts are up to multiple times higher than currently observed.” To mitigate the impact of climate change, it is essential to limit the global temperature rise to 1.5 degree Celsius. In order to limit the average global temperature, there is a need to implement decarbonization measures that can bring substantial reductions in emission intensity across geographies and sectors, particularly, energy intensive and hard-to-abate sectors.
As per the report submitted by the UN High-Level Climate Action Champions, USD125 trillion of climate investment is needed by 2050 to meet net zero target. According to a report by the Council on Energy, Environment and Water (CEEW) India would need to mobilise investments worth over USD10 trillion to achieve its net-zero commitments. The Green, Social, Sustainable, Sustainability-linked and transition labeled (GSS+) debt securities have seen incredible growth in recent years. According to Climate Bond Initiative (CBI) report, as on Q3, 2023, cumulative listing of GSS+ bonds stood at USD 4.3tn.
However, the mobilization of funds towards climate actions has been restricted to certain sectors which are already at near-zero or low carbon emissions. The need of the hour is to cover all sectors, especially hard-to-abate sectors. This gap is currently not being met with the existing GSS+ labelled bonds. In this context, transition finance instruments such as transition bonds, transition loans etc. have emerged as an alternative to fill this financing gap. Taking into consideration the critical need for transition finance, the development of such financing instruments being at a nascent stage, and lack of globally recognized framework, IFSCA has constituted an Expert Committee on Climate Finance with special focus on transition.
Terms of References of the Committee
i. To assess the trends in climate financing across the world, identify best practices and assess requirement of climate Finance with special focus on transition in India by 2047.
ii. To recommend a regulatory framework for transition finance instruments utilizing the IFSCA draft framework as a starting point.
iii. To recommend policy measures by Government of India in order to promote transition finance from GIFT IFSC, including legal, taxation, regulatory etc.
iv. To advise IFSCA on the approach to developing a reliable and cost-effective ecosystem for transition finance meeting needs of Indian industry.
v. To provide a roadmap and timelines for IFSCA to develop climate finance ecosystem and instruments at GIFT IFSC.
vi. To recommend policies and regulations for establishment of GIFT-IFSC as the global hub for climate financing, as deemed fit by the committee.
Committee Members
| Sr. No |
Name | Designation | Capacity |
| 1 | Mr. Dhruba Purkayastha |
Director – Growth and Institutional Advancement, CEEW |
Chair |
| 2 | Mr. Shalabh Tandon |
South Asia Head of Operations & Climate, IFC (World Bank Group) | Member |
| 3 | Mr. Prabodha Acharya |
Chief Sustainability Officer, JSW Group | Member |
| 4 | Mr. Gaurav Bhagat | MD & Head of Financial Institutions, South Asia, MUFG | Member |
| 5 | Mr. Gagan Sidhu | Director, CEEW-Centre for Energy Finance | Member |
| 6 | Mr. Piyush Jha | Head, Climate and Sustainable Finance, Tata Steel Limited | Member |
| 7 | Ms. Neha Kumar | Head, South Asia Programme, Climate Bonds Initiative | Member |
| 8 | Ms. Roopa Satish | Country Head, Sustainable Banking & CSR, IndusInd Bank | Member |
| 9 | Mr. Ajay Sirikonda | Partner, EY | Member |
| 10 | Mr. V Balasubramaniam | MD & CEO, NSE IFSC Limited | Member |
| 11 | Mr. Saurabh Chakravarty |
Head Treasury, Ultra Tech Cement | Member |
| 12 | Mr. Hemal Mehta | CFO, Edelweiss Alternative Asset Advisors ltd | Member |
| 13 | Mr. Jagjeet Sareen | Partner, Global Climate Practice, Dalberg Advisors | Member |
| 14 | Mr. Abhilash Mulakala |
General Manager, IFSCA | Member Secretary |
4. Approach of the Committee
The Committee was tasked with the overall aim of expanding offerings – both in terms of instruments and sectors in which investments can flow. It had to keep in mind that IFSCA also caters to foreign investors which could be through Indian Banking, Financial services, and Insurance (BFSI) entities. With this mandate, the overall work and the committee were structured into 3 sub-groups:
a) Scope and Definition,
b) Policy and Regulation, and
c) Financial Instruments
The first component is the scope and definition aspect since this will allow guardrails to be put in place and also give confidence to investors.
The second component helps build a regulatory framework that IFSCA can implement, and also provides policy recommendations to GoI on how transition finance can be mobilized through IFSC more efficiently and effectively.
The third component comprising market and institutional interventions, not only looks at the development of new products – on both assets and liabilities – but also at ways of designing pilot transactions, thereby giving banks and FIs more confidence in adopting the new product offerings.
The objectives of each of the above sub-groups are:
a) Scope and Definition – Establish scope and definition for transition finance.
b) Policy and Regulation – Provide policy and regulatory recommendations feeding into a regulatory framework document.
c) Financial Instruments – Identify market and institutional interventions required.
5. Acknowledgment
The Committee wishes to express its profound gratitude to Mr. K. Rajaraman, Chairperson of IFSCA, for establishing the expert committee on Climate Finance. His vision has provided an exceptional platform for members to engage in thorough discussions and formulate actionable recommendations for developing a regulatory framework on transition finance in GIFT IFSC.
We are deeply appreciative of Mr. Pradeep Ramakrishnan, Executive Director of IFSCA, for his exemplary leadership of this initiative. Mr. Ramakrishnan’s unwavering support was crucial to the successful functioning of the committee throughout our deliberations.
Our sincere thanks go to Ms. Neha Khanna for her invaluable contributions. Her support to the committee chair was pivotal in ensuring the seamless operation and progress of our work.
The committee also recognizes the significant support provided by Mr. Rajesh Kumar Miglani, Ms. Aditi Bhatia, Ms. Esha Sar, Ms. Upasana Handa, Mr. Dharmesh Tejani, Mr. Subahoo Chordia, Mr. Mayank Thukral, Mr. Rawson Gonsalves, and Mr. Dishant Rathee. Their insights and assistance were invaluable to our efforts.
Lastly, we extend our heartfelt appreciation to the entire IFSCA Sustainable Finance team, including Mr. Abhilash Mulakala (GM), Mr. Chintan Panchal (Manager), and Mr. Abhineet Panwar (AM). Their coordination and extensive support were instrumental in the finalization of our recommendations.
6. Executive Summary
The world requires a staggering USD 125 trillion in climate investments by 2050 to achieve net-zero emissions. India’s share of this challenge is equally significant, with estimates suggesting the country needs over USD 10 trillion by 2070 to meet its climate goals and net-zero commitments. Domestic finance is crucial for India’s climate action. A 2022 report by the Climate Policy Initiative (“Landscape of Green Finance in India 2022”) found that domestic sources accounted for the majority of green finance in India, at 87% and 83% in fiscal years 2019 and 2020, respectively. While international sources are increasing (from 13% in FY 2019 to 17% in FY 2020), they are still insufficient to meet India’s net-zero target. Therefore, greater participation from international finance is essential. In this context, GIFT-IFSC is uniquely positioned to play a key role. It can act as a channel for foreign capital, not only for India’s net-zero goals, but also for other developing countries.
The market for GSS+ labelled bonds and loans has seen growth, but its impact has been limited to already green or net-zero emission sectors. To address this gap, “transition labelled instruments” are emerging across the world. However, there’s currently no universally agreed-upon definition of “transition finance.” Various regulatory bodies, standard-setting organizations, and institutions around the world have developed their own versions for financing transition. Given GIFT-IFSC’s role as a gateway connecting India to the global economy, a key challenge is creating an enabling framework for “transition finance” in a way that attracts international investors while also considering India’s socio-economic realities. By analysing existing global definitions and best practices, the report has analysed areas of convergence and common parameters. The report proposes various alternative approaches for IFSCA to consider, aiming to support India’s journey towards net-zero emissions by 2070.
The report has also delved into policy and regulatory levers in order to increase the mobilization of transition finance through financial instruments through GIFT-IFSC. Beyond defining the scope, definition, policy and regulations for transition finance, the report addresses financial structures and instruments to mobilize these investments. It recognises the need for innovation not just in debt and equity instruments, but also in risk mitigation tools like insurance and guarantees. Additionally, the report recommends various tools to support the capture and standardization of information, which is crucial for effective transition finance.
The committee’s comprehensive recommendations aim to create a robust ecosystem for transition finance at GIFT-IFSC. This ecosystem will not only facilitate capital mobilization for India’s net-zero goals, but also serve as a springboard for other developing economies on their journeys towards sustainability.
7. Context
The Paris Agreement calls for making finance flows consistent with pathways towards low greenhouse gas emissions. To limit the average global temperature, increase to 1.5 degree Celsius, there is a need to implement decarbonizing measures and strategies that can bring about substantial reduction in emissions intensity across geographies and sectors, particularly, in energy intensive and hard-to-abate sectors such as steel and cement. To achieve this, a directed and simultaneously inclusive approach is necessary for financing the global low-carbon economic transition, that also addresses the concerns of Emerging Markets and Developing Economies (EMDEs).
It is estimated that capital investment of approximately USD 3.5 trillion per year is required by 2050 to shift to a global net-zero economy and avert the apparently inevitable climate catastrophe1. India would need cumulative investments of over USD 10 trillion by 2070 to achieve its net-zero ambitions2. Given that the tracked finance flows to climate mitigation account for approximately 25% of the total climate investments required3 in India, it can be inferred that the transition to net-zero will require a significant increase in climate investments — not only toward cleaner energy and transport, but also to hard-to-abate sectors like industries and buildings, with a focus on reduction in carbon emissions. While financing cleaner technologies is relatively easier and well-defined as ‘green’, financing transition to low-carbon emissions in hard-to-abate sectors is much harder and does not have a well-defined approach. If India is to achieve its net-zero target, finance flows toward decarbonization of hard-to-abate sectors is critical. Finding solutions would require deploying and scaling up new and innovative technologies, often called transition technologies. However, financing such technologies is currently limited and constrained by a lack of clear definition and taxonomy. Transition finance, which is inclusive of sectors and geographies, has emerged to fill this gap.
Emissions abatement in industrial sectors will rely on a combination of best-available technologies — energy efficiency, renewable energy, alternative fuels, etc. — during this decade, and breakthrough technologies such as green hydrogen, carbon capture, direct electrification, etc., post-2030 (discussed later in this report). Unlike the power and transport sectors where green technologies such as solar PV/wind and battery energy storage can shift the sectors to low/near-zero carbon emissions, industrial sectors will likely undergo a gradual transition. Utilization of the best available and commercially viable technologies is needed to keep the cumulative emissions (‘area under the curve’) to a minimum, while also investing in commercial-scale demonstrations and scaling up of breakthrough technologies until they are ready for market-based financing. Investments are needed in technologies that can lower emissions intensity of the sector, though these may not be green/near-zero emissions and are therefore incompatible with net-zero/climate neutrality targets. Most of these technologies are Capex and Opex heavy and require massive investments.
Public capital alone is not sufficient to meet the demand for financing the transition in industrial sectors, and much larger sources of private capital must step in. Transition finance is emerging as an important category of finance that can enable private finance to flow towards ‘transition activities’ that are otherwise not a part of green finance markets. Transition finance instruments can help trigger entity-wide transformations and reduce the exposure to transition risks.
Public capital alone is not sufficient to meet the demand for financing the transition in industrial sectors and much larger sources of private capital must step in. Mobilization of capital, both domestic and international, is needed. International Financial Services Centres (IFSCs), therefore, have an integral role to play since they can be the conduits for international capital to flow.
Examples of Transition Finance initiatives
As Per the Organisation for Economic Cooperation and Development (OECD), transition finance can be defined as finance deployed or raised by economic agents to implement their net-zero transition, in line with the temperature goal of the Paris Agreement and based on the credible climate transition plans with measurable results. OECD has defined transition finance as a financing approach that ‘focuses on the dynamic process of becoming sustainable, rather than providing a point-in-time assessment of what is already sustainable, to provide solutions for a whole-of economy decarbonization.’ Contrary to green finance, transition finance intends to allocate capital to companies and activities that are not ‘green’ but are in the process of ‘becoming green’, or in the process of reducing emissions (and therefore, lowering their exposure to transition risks), emphasizing both inclusiveness and environmental integrity to avoid greenwashing4.
According to Climate Bonds Initiative (CBI), the ‘transition’ label can be used for eligible investments that are making substantial contributions to halving global emissions levels by 2030 and reaching net-zero by 2050, but do not have a long-term role to play {i.e. beyond 2050), and the activities that will have a long term role to play but at present, their long term pathway to net zero goals is not certain.
Under Article 10 (2) of the European Union Taxonomy Regulation, transition activity is defined thus: ‘..an economic activity for which there is no technologically and economically feasible low-carbon alternative shall qualify as contributing substantially to climate change mitigation where it supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees C above pre-industrial levels, including by phasing out greenhouse gas emissions, in particular emissions from solid fossil fuels, and where that activity:
a) has greenhouse gas emission levels that correspond to the best performance in the sector or industry;
b) does not hamper the development and deployment of low-carbon alternatives; and
c) does not lead to a lock-in of carbon-intensive assets, considering the economic lifetime of those assets.’
As per Japan’s Ministry of Economy, Trade and Industry, transition to net-zero should comprise a transition phase where all sectors maximize efforts to decarbonize as much as possible through process efficiencies — typically energy efficiency, fuel switching, material circularity, etc. The aim is to reduce emissions until technologies like carbon capture and storage become economically viable.
According to International Capital Markets Association (ICMA)5, a ‘transition’ label applied to a debt financing instrument should serve to communicate the implementation of an issuer’s corporate strategy to transform the business model in a way which effectively addresses climate-related risks and contributes to alignment with the goals of the Paris Agreement.
According to the Asian Development Bank6, ‘Transition finance is a concept where financial services are provided to high carbon-emitting industries – such as coal-fired power generation, steel, cement, chemical, paper making, aviation and construction – to fund the transition to decarbonization.’
According to G20 Sustainable Finance Working Group, Transition Finance7 is defined as ‘financial services supporting the whole-of-economy transition, in the context of the Sustainable Development Goals (SDGs), towards lower and net-zero emissions and climate resilience, in a way aligned with the goals of the Paris Agreement.’
The Climate Finance committee set up by IFSCA believes that the ADB and G20 approaches reflect the economic realities of India much better than the EU’s approach, given India’s economic development scenario and income levels. It may be useful to note that while some definitions lend themselves to ‘green’, and others to ‘sustainable’, there is a lack of clarity on how finance can be qualified for transition activities.
Clarifying Green and Transition Finance
For transition finance to become mainstream as a class of directed financing, a definition and clear understanding of boundary conditions is the first step. Currently, there is a lack of global consensus on the definition and framework for transition finance. As a result, the market for transition finance is currently small and there is ambiguity on the role of Financial Institutions (FIs) in financing transition activities. Guidance on transition finance exists only in a few places like the EU and Japan. A few independent organizations have developed their own frameworks and guidance principles (described above and tabulated in Appendix 2: Definitions and Guardrails). However, it is important for these principles to define ‘transition activities’ and differentiate between transition finance and green finance. Table 1 below highlights this difference. In addition, transition finance frameworks for FIs should consider which technologies are to be deemed ‘best-available technologies’; sector-specific benchmarks and targets to be used as reference for ‘transition pathways’; and global alignment while accounting for country-level and industry constraints. These and other policy and regulatory aspects have been discussed, and recommendations are presented in the following section.
Table 1: Difference between green and transition finance
| Green Finance | Transition Finance | |
| Definition | Financing zero/near- zero-emissions technologies that are aligned with the Paris Agreement | Reducing emissions for hard-to-abate sectors or sectors that are important for emissions reductions in other sectors (as enablers). In most cases, these activities are not Paris Aligned but are important due to the lack of suitable ‘green’ alternatives. |
| Examples | Solar PV, Wind | Steel, Cement, Shipping, Aviation, Heavy-duty transport, etc. |
8. Deliberations and Recommendations
8.1 Pillar 1 – Scope and Definition of Transition Finance
This aims to provide clarity to entities seeking to raise capital for financing transition activities and projects/businesses, and to provide confidence to investors and lenders.
The following trends and imperatives provide valuable background and justification for the recommendations that have been put forth.
Global initiatives: Various efforts are underway in multiple jurisdictions by governments and regulators, by international standard-setting bodies and coalitions, as well as individual institutions, that draw from existing mandates and/or voluntary standards, to match the scope of their operations. Their initiatives on transition finance come in many different forms, including guidelines, frameworks, guidance, taxonomies, handbooks, and white papers. The sub-group on Scope and Definitions mapped ten significant initiatives to arrive at specific recommendations for IFSCA. The list of evaluated frameworks is in Table 2.
Domestic initiatives: Capital market regulator SEBI, issued guidelines that expanded the scope of green debt securities to include transition bonds and plans, that also need environmental and social risk assessment pertaining to the investment and impact reporting. A granular classification system to screen activities, however, remains to be developed to guide the flow of thematic international (and local) capital for such activities at scale.
The Ministry of Finance (MoF) set up a Sustainable Finance Task Force in 2021. The terms of reference of the Task Force include defining the framework for sustainable finance in India, establishing the pillars for a sustainable finance roadmap, suggesting draft taxonomy of sustainable activities and a framework of risk assessment by the financial sector.
Rapidly evolving theme: Transition finance, both in concept and practice, is only a few years old, and is rapidly evolving. Hence, it is desirable to align with globally recognized good practices, investor expectations, and account for any Indian context-specific particularities, such as the 2070 pathway to net-zero emissions. It is also important to recognize that enormous capital will need to be mobilized to front-load investments in the current decade for an orderly transition. Specifically, India would require investments of over USD 10 trillion to achieve net-zero by 2070, at an average rate of about USD 200 billion per year (CEEW, 2021).
Investor expectations: Preferences of international (and domestic) investors point to the need and opportunity to finance transition in hard-to-abate sectors. International investors point out that national frameworks and taxonomies are welcome for their signaling effect on the market and leadership. However, for international investors, the opportunity cost accruing from the additional effort of translating the differences in different taxonomies and standards is perceived as high, and they would likely fill this gap with some existing international framework or taxonomy.
Market integrity: Integrity is central to the growth of the market and for the smooth flow of transition finance. This is emphasized by international investors (and by regulators worldwide), implying the need for a robust assurance system8 through external verification when thematic capital is raised using a label. The ‘transition finance’ label, for transition bonds/loans (Use of Proceeds) and sustainability-linked bonds/loans (outcome linked), while lucrative to issuers and witnessing a huge potential for growth, is also subject to heightened investor scrutiny for transparency, measurable progress, and accountability from companies embracing transition finance.
Deal flows: Trends relating to growth in the cumulative volume of green, social, sustainability, and sustainability-linked (GSS+) debt, show global tally at USD 4.2 trillion
in 2023 (Climate Bonds Initiative, 2023), with 67% dominated by green bonds; social bonds at 16%; sustainability bonds at 14%; Sustainability-Linked Bonds (SLBs) at 3%; and transition bonds making up 0.3%9. High investor scrutiny for SLBs may have disincentivized issuers and investors alike.
SLBs have been facing considerable scrutiny due to lack of credibility owing to linkages with greenwashing as a result of inadequate structural and calibration features, and weak underlying transition plans. Transition plans are being increasingly asked for by investors and regulators to check if they include all material sources of emissions and reinforce the issuers’ commitment through credible financial planning10.
Notes:
1 Report on “Achieving A Transition Finance Framework in The EU” by E3G
2 https://www.ceew.in/cef/publications/investment-sizing-india-s-2070-net-zero-target
3 https://www.climatebonds.net/files/reports/cbi susdebtsum q32023 01e.pdf
4 https://www.climatebonds.net/files/reports/cbi slb report 2024 04d.pdf
5 https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Climate-Iransition-Finance- Handbook-December-2020-091220.pdf
6 https://blogs.adb.org/blog/transition-finance-critical-address-climate-change
7 https://g20sfwg.org/wp-content/uploads/2022/10/2022-G20-Sustainable-Finance-Report-2.pdf
8 International standards such as Climate Bonds have established a process for external verification, which is widely used and can be adopted or recognized by IFSCA to avoid duplication.
