By Dr Samar Verma*
Building Climate Finance from Within: A Domestic Strategy Emerges
Public Investment and Cities Drive the New Climate Finance Agenda
Climate change has found a distinctive place across many Economic Surveys in the past 10 years, and rightly so. However, unlike in the past years, the most recent Survey frames climate discussion as adaptation, and resilience-led, explicitly sub-national in orientation, and anchored in financing constraints and public investment–led resilience. This is a notable departure from the past, geared more towards a delivery-and-growth-protection framing than earlier editions.
Climate Action as Macroeconomics, Not an Add-On
That climate action, in a country like India, cannot be treated as an “environment add-on” is a striking strength of the latest Economic Survey of India 2025-26. It insists that Climate action must be treated as macroeconomics- a question of investment, risk, productivity, competitiveness, and the cost of capital. In framing environment and climate change as the project of building a resilient, competitive and development-driven economy, the Survey places the debate exactly where it belongs- inside the core growth strategy, not at its margins.
That framing matters because the binding constraint on climate action is increasingly not intent, but finance- especially domestic finance at scale. International flows remain uncertain and contested, and in any case arrive with transaction complexity and, often, currency risk. The Survey is candid that developing countries, facing higher risk premia and shorter-term lending, will have to rely more heavily on their own resources- without compromising macroeconomic stability.
The question, then, is not whether domestic climate finance is desirable; it is how to mobilise it at the pace and price needed.
Public Investment and the Sub-National Advantage
One underappreciated point in the Survey’s chapter is that India is already financing a significant share of climate-relevant adaptation through domestic public investment embedded in development sectors. It notes that adaptation and resilience-related domestic spending rose from 3.7% of Gross Domestic Product (GDP) in Financial Year 2015–16 (FY16) to 5.6% of GDP in Financial Year 2021–22 (FY22).
This matters for at least two reasons. First, it demonstrates fiscal capacity to prioritise resilience when it is seen as development protection- protecting livelihoods, infrastructure, and growth from climate shocks. Second, it reinforces a critical insight for raising finance. Climate action becomes bankable faster when it is embedded in sub-national, service-delivery functions- water, waste, transport, buildings, distributed energy, urban resilience- where benefits are immediate and measurable, and where local institutions can develop repeatable pipelines. The Survey explicitly emphasises that climate risks and solutions are location-specific, making sub-national measures central rather than peripheral.
In economic terms, this is the logic of a “portfolio”. Thousands of smaller, standardised, investible projects across states and cities will mobilise domestic savings more reliably than a narrow set of megaprojects.
The Cost of Capital and the Investibility Challenge
The Survey notes the familiar barriers: high cost of capital for climate projects, limited long-term institutional investor participation, and underdeveloped risk-mitigation and risk-sharing mechanisms- particularly for emerging technologies and large-scale adaptation.
This is where the domestic agenda must be explicit. Mobilising climate finance is not merely about “more money”. Instead, it is about lowering risk and lowering intermediation costs.
That requires three reinforcing levers.
First, deepen the bond market because climate infrastructure is long-duration. The Survey argues that deep and liquid bond markets are essential for climate infrastructure, which requires large upfront capital and long repayment horizons. This point is not technical trivia; it is structural. India’s household savings and institutional pools (insurance, pensions, provident funds) are naturally suited to long-duration assets- if instruments are liquid, transparent, and available in benchmark size.
In this context, two bond-market pathways deserve special focus. One is sovereign green bonds as a market-making instrument. The Survey notes sovereign green bond issuance of ₹15,000 crore in Financial Year 2025–26 (FY26), with cumulative issuance reaching ₹72,697 crore since Financial Year 2022–23 (FY23). Beyond funding, these issuances help build a pricing curve, improve standards, and create signalling effects that reduce greenwashing risk. And two, municipal green bonds as the missing middle of domestic climate finance. The Survey cites Indian examples (Indore, Ghaziabad, Ahmedabad, Vadodara) and estimates that municipal green bonds could unlock United States Dollar (USD) 2.5–6.9 billion over the next 5–10 years. The macro logic is compelling. Cities sit at the intersection of adaptation and mitigation- water, sewage, waste, heat management, transport, building efficiency- yet their capital financing remains constrained.
The agenda here is not simply “issue more bonds”. It is to make a reliable municipal credit market by standardising project appraisal, ring-fencing revenues where feasible, improving financial reporting, and using credit enhancement structures selectively to reach domestic institutional investors.
Second, regulation should be re-imagined as a finance policy to reduce uncertainty, price externalities and improve trust. One of the chapter’s most important contributions is its explicit grounding of environmental regulation in welfare economics- pollution as a negative externality and a market failure if left unpriced or unchecked. But the Survey goes further by moving beyond a stale command-and-control debate. It recognises the limits of rigid standards and highlights the role of market-based instruments and risk- and outcome-based regulation- approaches associated with better cost-efficiency, innovation incentives, and lower compliance burden when designed well. In economic terms, this is about reducing information asymmetry and agency problems- classic reasons markets underfund long-horizon public goods.
This is directly relevant to domestic climate finance because capital is allergic to regulatory uncertainty. Predictable, technology-enabled, trust-based governance reduces “policy risk premia”- a real component of the cost of capital. In fact, the Survey’s conclusion explicitly points to risk-based regulation, digital compliance, and trust-based governance as key to reconciling environmental protection with improved business operations.
In parallel, sustainable finance regulation- green bond disclosure norms, sustainability reporting, and related frameworks- creates the informational infrastructure domestic investors need to allocate capital confidently. The Survey documents the evolution of India’s climate and sustainable finance framework, including green bond disclosure norms, sustainability reporting requirements, and green deposits acceptance frameworks.
Philanthropy and Blended Finance as Catalytic Capital
Third is the catalytic layer. What can philanthropy do that markets and budgets struggle to do? Domestic climate finance will not scale on regulation and bonds alone because the “last mile” constraint is often investibility: project preparation, risk allocation, measurement, and aggregation. This is precisely where the literature on blended finance and catalytic capital converges: catalytic funds- often public or philanthropic- can improve the risk-return profile of projects so that commercial capital can participate.
The International Finance Corporation’s work on blended finance in India is clear that there is no single instrument; structures can include guarantees, risk-sharing facilities, performance-based incentives, concessional debt/equity, and design-stage support- selected to address the binding risk in each context. Comparable syntheses stress that a recurring barrier is insufficient support for preparing investible projects and weak matchmaking between project supply and investor demand.
For a domestic climate finance agenda, philanthropy’s most productive roles are therefore not as a substitute lender, but as a market builder, often through innovative financing mechanisms. This means at least four things. Project preparation facilities at the sub-national level [feasibility, Detailed Project Report (DPR) quality, contracting templates, revenue models, Measurement, Reporting and Verification (MRV)], converting “good ideas” into investible assets. Credit enhancement and first-loss support for early issuances and new asset classes (e.g., municipal climate services, distributed resilience infrastructure), used sparingly and transparently to avoid hidden fiscal liabilities- an explicit caution the Survey itself makes about de-risking tools. Aggregation platforms that pool many small projects into standardised portfolios, enabling bond-market access and lowering transaction costs- especially important for Micro, Small and Medium Enterprises (MSME) energy efficiency, urban services, and distributed clean energy. And finally, data and integrity infrastructure- supporting robust disclosure, third-party verification capacity, so domestic capital trusts labels and performance claims. This catalytic approach aligns with the broader idea of philanthropic capital as “risk-tolerant” capital used to unlock larger pools of private finance for sustainable development.
Toward a Sub-National Clean Growth Strategy
Putting these threads together yields a pragmatic pathway consistent with the Survey’s “development realism” framing.
Build state- and city-level pipelines, not one-off projects. Treat climate investment as a continuous function of economic governance- planning, procurement, delivery, and measurement- because scale comes from repetition.
Use domestic public finance to crowd in, not crowd out. Public capital should fund public goods (adaptation, resilience services, early-stage platforms) and strategically absorb risks that markets cannot price yet.
Make municipal finance a serious climate finance channel. Standardise municipal green bond readiness, strengthen disclosures, and use targeted enhancements to unlock domestic institutional capital.
Treat regulation as an investment policy. Risk-based, outcome-focused, technology-enabled regulation lowers uncertainty, supports innovation, and reduces the cost of capital- precisely what domestic mobilisation requires.
Deploy philanthropy as catalytic infrastructure. Fund project preparation, aggregation, data integrity, and selective risk-sharing so domestic capital can flow into a new climate asset class.
Climate Finance as a Competitiveness Policy
The Survey’s framing is ultimately a competitiveness argument. Climate action must be sequenced, financed, and governed in a way that protects energy security and lowers system costs, rather than raising input costs for firms and households.
Domestic climate finance is therefore not only about meeting environmental targets. It is about building a financial system that can fund long-duration, productivity-enhancing, risk-reducing investments in local currency, especially at the sub-national level where implementation happens. If India can make that shift- through deeper bond markets, credible regulation, and catalytic market-building- then raising climate finance from domestic sources becomes less a heroic exception, and more a routine feature of development.
That is the quiet power of the Survey’s reimagined framework. Climate finance is mainstream economics. Institutions, regulators, cities, states, and catalytic capital, too, must reimagine their respective roles.
*Samar Verma, PhD, is a senior economist, public policy professional and an institution-builder, with 28 years of experience in economic policy research, international development, grant management, and philanthropic leadership. Views are personal.
