Climate finance is often framed as a question of mobilizing capital. In practice, the challenge is not mobilization — it is allocation.

Capital is growing at scale globally, but it is not allocated evenly across sectors, geographies, or technology maturity curves. Global climate finance flows reached $1.9 trillion in 2023, with early estimates exceeding USD 2 trillion in 2024, yet annual investment needs average USD 8.6 trillion from 2024–2050 to mitigate extreme climate impacts. The gap is not just one of volume — it is one of direction.

What experience teaches about capital

My understanding of this did not come from theory, but from working across the system.

Early exposure to banking revealed how financial decisions, often framed as technical, shape real economic outcomes. What stood out was not how lending works, but what drives it — standardized frameworks that determine who can access capital, and who cannot. These frameworks are not neutral; they tend to favour sectors where risks have already been proven, structured, and repeated — and struggle to accommodate those that have not.

At the district level in India, the impacts are more immediate, as the lack or delay of capital limits access to essential services. While the government can mobilize resources on a large scale, it cannot do so independently.

Work in impact investing reinforced a different constraint. Backing early-stage enterprises solving real problems showed that viability alone does not guarantee scale. In climate-linked sectors, policy uncertainty and pricing distortions often determine whether capital flows at all. Markets respond to systems; they rarely lead them.

That insight became clearer while working on the draft for India’s sustainable finance taxonomy at the United Nations Development Programme. Policy does not simply enable markets — it defines the architecture within which private capital operates.

At the Rocky Mountain Institute, working with clean technologies and financial institutions made another gap evident: even when technologies are viable, scaling them requires alignment across policy, markets, and financial decision-making.

Over time, these patterns extend beyond individual decisions to shape entire sectors — determining where financing becomes repeatable, and where it does not. Climate finance sits at the intersection of these systems, which is precisely why it is complex.

What has changed — And why capital still does not flow

Over the past decade, climate finance has moved from the margins to the mainstream — but unevenly. This shift has been driven less by intent and more by economics.

In India, utility-scale solar scaled not just because costs fell, but because those cost declines were paired with deliberate risk mitigation. Government-backed payment security mechanisms — particularly through entities like the Solar Energy Corporation of India — reduced counterparty risk and enabled long-term contracting through power purchase agreements. This created what financial systems require: predictable cash flows, repeatable transactions, and standardized risk allocation. Over time, lenders were able to rely on operating data, benchmark performance, and underwrite projects through established credit templates rather than bespoke analysis. The result is visible in scale. India’s solar capacity now exceeds 150 GW.

A similar, though more gradual, pattern is emerging in electric mobility. Policy support has enhanced the total cost of ownership, which has boosted adoption rates and led to the standardization of financing models in specific segments, especially two- and three-wheelers. However, gaps still exist for newer segments, like heavy-duty vehicles. India’s EV market recorded over 2.3 million unit sales in 2025, mainly backed by two and three-wheeler sales based on vehicle registration data from the VAHAN database.

Together, these examples illustrate a broader principle: capital flows not simply to low-risk sectors, but to sectors where risk has been standardized and made legible to financial systems. This explains why capital has scaled rapidly in renewable energy and, increasingly, electric mobility — and why it has not flowed at the same pace to other transition-critical sectors.

Areas such as battery energy storage and industrial decarbonization face a different set of constraints. India’s battery energy storage market, for instance, has seen significant tender activity — with over 90 GWh announced or under development — but only a small fraction has reached operational scale, reflecting evolving revenue models and limited performance history.

Similarly, sectors such as steel — responsible for 7–8% of global emissions, as noted by the World Steel Association— require large upfront investments, face uncertain transition pathways, and lack stable demand signals for low-carbon products.

What links these sectors is not technology similarity, but financing complexity: limited operating track record, evolving or uncertain revenue models, dependence on policy and market signals, and the absence of comparable transaction data. As a result, they do not fit easily within existing credit frameworks, making it difficult for financial institutions to assess and price risk in a consistent, decision-useful manner.

This is where the limitation of current financial systems becomes most visible. Credit processes are built on historical performance and comparability. In emerging sectors, however, historical data is either limited or not decision-useful. The consequence is not simply caution — it is structural bias. Financial institutions continue to prioritize sectors where past data provides comfort, even when future risks or opportunities suggest a different allocation may be warranted.

This dynamic is further amplified in emerging markets, where the cost of capital is structurally higher. As highlighted by the International Energy Agency, financing costs for clean energy projects are significantly higher than in developed economies. Where risks are not yet standardized or well understood, this premium increases further. For lenders, uncertainty translates directly into higher required returns, raising hurdle rates and narrowing the set of projects that meet investment criteria.

In effect, the absence of standardization does not just delay financing; it makes it more expensive, reinforcing the tendency of capital to flow towards sectors where risks are already well defined and priced.

What needs to change: From intent to system design

If climate finance is to scale beyond already viable sectors, the shift required is not necessarily more capital, but a change in how financial systems evaluate and allocate it. At the core is the need to move from high-level commitments to net-zero targets to decision-useful frameworks that can operate within existing credit processes.

One emerging approach is Corporate Transition Assessment (CTA) — a forward-looking methodology that evaluates whether a company’s transition strategy is credible at the asset and business level, particularly in the absence of historical benchmarks.

Rather than relying on disclosures or ESG scores, CTA focuses on underlying drivers of future performance — capital expenditure plans, alignment with transition pathways, and exposure to policy and market shifts.

For financial institutions, the relevance is direct. CTA provides a structured way to incorporate forward-looking insights into credit processes — informing risk assessment, client engagement, and capital allocation decisions. It enables banks to distinguish between credible transition strategies and those that remain largely aspirational.

However, improved assessment alone is not sufficient. Risk does not disappear — it must be allocated.

For lenders, the question is not whether transition sectors are risky, but which risks should sit with borrowers, which with lenders, and which require public or concessional capital to absorb.

The experience of sectors such as renewable energy suggests a consistent pattern: capital scales when uncertainty is reduced or redistributed through deliberate interventions. Instruments such as guarantees, blended finance, and first-loss capital do not just mobilize capital — they reshape risk-return profiles in ways that make financing feasible. Without such mechanisms, even well-understood transition opportunities can struggle to scale — particularly in emerging markets.

The question ahead

Climate finance is often positioned as adjacent to development and humanitarian priorities. In practice, it sits upstream of them.

Whether capital flows to clean industry, resilient infrastructure, or affordable mobility determines — in advance — how economies absorb shocks, how jobs evolve, and how communities experience climate impacts. By the time humanitarian or development interventions are required, many of these outcomes have already been shaped by earlier financial decisions.

The allocation of capital today determines which sectors decarbonize, which remain exposed, and how risks are distributed across society. Yet financial systems continue to prioritize what is already bankable, rather than what is necessary.

Climate finance will continue to grow in scale. The more important question is whether it will be allocated differently.

Unless underlying constraints are addressed — particularly how risk is assessed, structured, and integrated into decision-making — capital will continue to flow to what is already viable. The transition will progress, but not necessarily where it matters most — and the consequences of that misallocation will increasingly be felt downstream, in the very development and humanitarian systems climate finance is meant to support.

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About the author

Riya Saxena is a climate finance specialist with nearly a decade of experience in India’s development sector, focused on mobilizing the capital required to meet India’s net-zero target by 2070. She currently leads climate finance initiatives for India at Rocky Mountain Institute (RMI), where her work centres on accelerating electric vehicle (EV) financing and enabling banks and NBFCs to integrate climate considerations into lending and scale transition finance.

She is also a Visiting Fellow at Centre for Economic Transition Expertise at LSE (CETEx) at the London School of Economics and Political Science, where her research focuses on scaling transition finance in emerging markets.

Riya serves on the steering committee of the Greening of Finance by Women initiative, led by Agence Française de Développement, Small Industries Development Bank of India, and Shakti Sustainable Energy Foundation.

Previously, she was part of the sustainable finance team at United Nations Development Programme India, where she served as a member of the secretariat to the Ministry of Finance Taskforce on Sustainable Finance — supporting the development of India’s sustainable finance taxonomy, disclosure frameworks, and policy roadmap through engagement with regulators and industry. She was also part of the founding team at Asha Impact, an impact investment platform backing early-stage, for-profit social enterprises.

Her international experience includes consulting roles with Charities Aid Foundation and the Acumen Fund in London.

Riya holds a Bachelor’s degree in Economics from Hans Raj College, University of Delhi, and a Master’s degree in Development Economics from the London School of Economics and Political Science.

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In its ‘Global Voices’ section, Global Responsibility invites international experts to comment on current issues, challenges and opportunities in development and humanitarian policy. To ensure democratic and sustainable debates, it is essential that diverse and critical perspectives are taken into account. This commentary has been published as part of an International Partnerships Austria project, funded by the Austrian Development Agency (ADA). ADA accepts no responsibility for the content. Statements, opinions, and information contained therein are the sole responsibility of the respective authors and do not necessarily reflect the position or views of ADA.

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