Blended finance is set to play a crucial role in bolstering India’s transition to clean energy by its capacity to attract greater private investment into impactful climate initiatives, according to a report by the International Finance Corporation (IFC).

Blended finance involves the integration of concessional funds from sources like governments or philanthropic organizations with funds from development finance institutions (DFIs) such as the IFC. This strategy has the potential to mobilize private sector investments for projects with substantial development impact.

IFC’s “Blended Finance for Climate Investments in India” report underscores blended concessional finance as an innovative financing approach to stimulate private sector investments in projects that address climate mitigation and adaptation while yielding significant development benefits.

These projects may be on the verge of commercial viability but require additional financial support to mitigate risks, provide incentives, or rebalance the risk-return profile to attract private sector investors.

The report underscores the importance of resolving regulatory obstacles, collaborating with donors and DFIs, enhancing institutional capabilities, and establishing a regulatory sandbox. It suggests launching pilot transactions utilizing existing frameworks while regulatory adjustments are in progress to kickstart the market.

While India is aiming for a 45% reduction in the emissions intensity of its GDP by 2030 compared to the 2005 level and a target to generate 50% of its power capacity from non-fossil fuel sources, the country faces a substantial challenge due to greenhouse gas emissions, primarily driven by the energy sector, which accounts for approximately 75% of India’s total emissions.

To tackle this challenge, the report identifies various critical sectors, including energy, transport, waste management, agriculture, biodiversity, health, and others, where investments should be prioritized to support India’s climate mitigation and adaptation objectives.

However, achieving its net-zero targets will require a significant increase in climate investments, rising from the current $18 billion annually to $170 billion annually until 2030. India’s available investment for climate action currently stands at just $44 billion annually, as reported by the Climate Policy Initiative in 2022.

Shalabh Tandon, Regional Head of Operations and Climate and Interim South Asia Director, IFC, said, “The blended finance market in India is growing and at a critical inflection point. There is an urgent need for blended finance to support climate investments in agriculture, land and water management, power, transport, infrastructure, health, industry, and circularity—in alignment with India’s net-zero ambitions as well as the government’s short, medium, and long-term development priorities.”

In April this year, the World Bank proposed a comprehensive framework for the energy transition in low and middle-income countries (LICs and MICs) involving the deployment of renewable energy and energy efficiency technologies and the phasing down of coal-fired power generation. The World Bank estimates that LICs and MICs will need to invest approximately $1.3 trillion per year in renewable energy and energy efficiency by 2030, which is more than four times the current level of investment.