Climate Finance: domestic resources insufficient to bridge funding gaps 

Economic Survey 2025-26 highlights the position of climate finance in India and developing countries 

Anushka Ganguly, Executive | corplaw@vinodkothari.com

The relevance of climate finance in climate action cannot be undermined, since climate change mitigation and adaptation require large-scale mobilisation of financial resources. The Economic Survey 2025-26, tabled in Parliament by Union Finance Minister Nirmala Sitharaman on January 29, 2026, highlights that the current climate finance levels are inadequate for developing countries to achieve their climate goals. This climate funding gap is not a lack of ambition, rather, is imbibed in the structural weaknesses of the international financial system. 

1. Climate Finance gap in India and other developing countries

By 2030, developing economies are estimated to need USD 5–6 trillion¹ for effective climate action. With that in mind, the following may be noted:

• Despite global efforts, developing countries continue to face a significant funding gap of around USD 4 trillion annually for sustainable development, as highlighted at the Fourth International Conference on Financing for Development (Compromiso de Sevilla)².
• Climate finance in India remains skewed towards only the mature sectors such as solar, wind energy and energy efficiency.
• Critical areas, including adaptation, financing for micro, small, and medium enterprises (MSMEs), urban infrastructure, and hard-to-abate industries, remain underfunded.

1.1.  Challenges in mobilising private capital for climate finance 

In 2023, global financial assets under management totalled USD 1.9 trillion, with private capital accounting for nearly USD 1.3 trillion³. Most of this private capital went to advanced economies, with China receiving another 30%, whereas other developing countries, excluding China, received merely around 15%. The reasons for such a gap include: 

• Developing countries, being more vulnerable to climate change, face higher borrowing costs owing to currency volatility, lower sovereign credit ratings, and financial systems that lack depth.
• Most of the abundant global capital flows to developed economies with stronger financial markets and economies that pose minimal risks. 
• Investors often hesitate to finance climate resilience projects in developing countries.

2. Policy Initiatives towards bridging the Finance Gap 

While the overall progress of the country towards the climate goals remain insufficient⁴, India has, over years, through policy initiatives and regulatory reforms, have mobilised climate finance to the extent that has  resulted in a 36% reduction in emissions intensity since 2005 and achieved 50% non-fossil power capacity ahead of schedule. The policy initiatives taken include the following:

• Allowing 100% foreign direct investment in renewable energy projects.
• Implementing SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework, green bond guidelines. [Refer to our BRSR resource centre]
• Provision of credit lines and financing for climate-related investments by Development finance institutions in India, including IREDA, NABARD, SIDBI, PFC, and REC.
• Issuance of Sovereign Green Bonds to fund low-carbon public infrastructure, providing policy signalling and market benchmarks. [Refer to our article on SGBs here]
• Introduction of green deposit framework by RBI that optimises the flow of credit to green activities/projects by channelising institutional and household savings, with guardrails in place to overcome greenwashing challenges. [Refer to our article on green deposits here]
• Incorporating risk mitigation, reconstruction, and recovery, as well as prevention, under the State Disaster Mitigation Fund (SDMF) and the National Disaster Mitigation Fund (NDMF), institutionalised as part of the Disaster Management Act 2005.
• Implementation of Glacial Lake Outburst Flood Mitigation Programme approved under NDMF to monitor glaciers and glacial lakes in the Indian Himalayan region.

2.1. Bridging the gap domestically

Currently, around 83 per cent of India’s finance for mitigation and 98 per cent of finance for adaptation is sourced domestically, reflecting strong internal financing. While relying solely on domestic resources is insufficient to meet India’s overall climate investment needs, some steps towards strengthening the domestic financial system may include: 

• Issuing municipal green bonds can unlock USD 2.5–6.9 billion for local bodies driven climate action over the next 5–10 years. 
• Strengthening the financial ecosystem through the mobilisation of blended finance, de-risking of projects, and capacity building through technical assistance and training through specialised development finance institutions like IREDA, NABARD, SIDBI, PFC, and REC can play a critical role in advancing India’s climate finance landscape by supporting low-carbon and renewable energy projects.
• Extending insurance coverage to safeguard people against economic losses associated with the physical risks of climate change, and improving the creditworthiness of climate-exposed borrowers such as farmers and MSMEs.

Conclusion

There is a wide disparity between the climate vulnerability and the funds available towards supporting the climate action. While policy incentives are being shaped towards mobilising domestic finance, an effective global response is required, particularly towards the developing countries. The global capital allocation needs to be mobilised towards areas where the investment needs for sustainable development are most pressing.

See our other resources:

1. Microfinance and NBFC-MFIs in Economic Survey 2026
2. Economic Survey 2026: Key Insights on Infrastructure Financing
3. Resources on Sustainability Finance
4. Resource Center on ESG and sustainability

1. UNFCCC (2024, September 10). Second report on the determination of the needs of developing country Parties related to implementing the Convention and the Paris Agreement: https://unfccc.int/documents/64075 ↩︎
2. UNDESA. Sevilla Commitment Fourth International Conference on Financing for Development: https://financing.desa.un.org/sites/default/files/2025-11/FFD4%20Outcome%20Booklet%20v5_EN_Digital%205.5×8.5.pdf ↩︎
3. Climate Policy Initiative. 2025. Global Landscape of Climate Finance 2025: https://www.climatepolicyinitiative.org/wp-content/uploads/2000/06/compressed_Global-Landscape-of-Climate-Finance-2025.pdf
   ↩︎
4. https://climateactiontracker.org/countries/india/net-zero-targets/ ↩︎