Financing a Just Transition in India
Around 160 million Indians are employed (either directly or indirectly) in the coal economy, construction, textiles, or internal combustion engine vehicle (ICEV) manufacturing. These sectors are key to the country’s shift to a low-carbon economy. Without careful planning, this transition could lead to loss of livelihoods, deepen existing inequalities and further marginalize vulnerable communities.
The shift to a low-carbon economy offers an opportunity to integrate climate action with inclusive development. A just transition in India requires a people-centered approach that prioritizes workers and communities through quality green jobs, reskilling and redeployment opportunities, income support, and dignified retirement. However, all these initiatives require dedicated financing mechanisms.
Unique Challenges to Financing a Just Transition
Traditional climate finance prioritizes building technology-related infrastructure like renewable energy or electric vehicles (EV), which have clear investment returns. For a just transition, finance must extend beyond capital investments to social needs — supporting workers, communities and livelihoods during the transition — which are harder to quantify and fund.
Social investments, such as skilling, resettlement or support to small businesses, often lack clear revenue models. Consequently, just transition projects appear high-risk and less attractive to private investors. De-risked instruments and blended finance models, which combine public, private and philanthropic capital, are underdeveloped in India, limiting risk-sharing opportunities for investors.
Small businesses and informal workers face financial barriers, including high-interest loans and delayed payments, restricting their ability to invest in sustainable processes and technologies. In Tamil Nadu, despite playing a key role in the state's EV sector, micro, small, and medium-sized enterprises (MSMEs) often encounter difficulties securing affordable credit due to steep interest rates and strict collateral requirements.
Women, particularly in agriculture, textiles and informal work, often lack access to credit, financial literacy and investment opportunities. As these sectors transition, targeted financial interventions will be needed to support them in learning new skills, starting businesses or finding jobs in the green economy.
The policy and regulatory landscape around just transition in India is also fragmented and lacks standardized financing guidelines. Investors find it difficult to align their priorities with transition goals due to the uncertainty around carbon pricing, green taxonomies and social impact metrics. Funds under the District Mineral Foundation (DMF) can support communities in coal-dependent regions but are often underutilized for just transition planning. India’s technology transition efforts must be complemented by a dedicated financial mechanism that supports worker reskilling, relocation and community redevelopment.
Financial Mechanisms Need to Integrate Equity, Innovation and Resilience
A robust financial ecosystem that can be accessed by affected communities, marginalized groups and women, is essential for a just transition. Financial systems should integrate social and environmental indicators alongside economic ones to assess the viability of investments. De-risked investments, as well as domestic and international capital flows, should support climate and development planning.
A new investment approach that combines both long-term capital and community partnerships can help create a financial ecosystem that supports economic growth alongside ecological sustainability. Green taxonomies that standardize processes, simplify access to sustainable financing, and support the broader adoption of green technologies need to be developed.
Blended finance
Public-private partnerships (PPPs) can help bridge funding gaps for small businesses. Banks, government and the private sector can collaborate to address technology, capacity-building, and bankability challenges for informal workers, women, and MSMEs, and make emerging business models financially viable. Innovative finance models, such as blended finance, can help attract private investment while reducing the risks associated with lending to women farmers. For instance, SEWA developed a parametric insurance product to help women workers recover income lost due to extreme heat. The program also provided climate adaptation support, including protective measures to reduce health and livelihood risks from rising temperatures.
Impact-linked financial instruments
Innovative financial models can enable a people-centered transition that meets both social and environmental goals. Sustainability-linked bonds are an inclusive financial instrument that ties investments to gender metrics. These should be complemented by infrastructure and systems to track gender-disaggregated data. Targeted policy interventions can encourage banks to allocate more credit to women and prioritize gender-focused lending.
Similarly, Germany’s Carbon Contracts for Difference program links subsidies to measurable outcomes such as emission reductions in industries. This approach helps industries decarbonize while ensuring economic stability for workers and communities during the transition. Partnerships with multilateral banks and public-private entities can play a key role in scaling up these innovative financing mechanisms.
Localized funding strategies
The Small Industries Development Bank of India (SIDBI) initiated a program to help MSMEs adopt sustainable practices by providing financial incentives for energy assessments and green investments. This reduces the additional costs borne by small businesses in using clean technologies and improving energy efficiency.
Results-Based Financing (RBF) is another innovative model that can be leveraged for a people-centered transition. Employed by the World Bank and the Asian Development Bank, this model disburses funds only when specific social and economic outcomes are met. This allows RBF to direct government funds to affected areas, supporting not just the reskilling of affected workers but also broader social protection for the community. This model involves an initial funder, an implementing party that delivers services, and an oversight body ensuring accountability. It helps address challenges like administrative inefficiencies and misallocated risks while providing a transparent grievance mechanism for beneficiaries.
Conclusion
A just transition is not just about cutting emissions — it’s about reshaping economies and societies to be more inclusive and resilient. Without the right financial structures, millions of workers, small businesses and vulnerable communities risk being sidelined in India’s low-carbon shift. The challenge is clear, but so is the opportunity: blended finance, impact-linked financial instruments and localized funding strategies can transform the just transition ambition into reality. By aligning finance with social equity, India can unlock innovation, create new livelihoods and build a green economy that works for everyone.
This blog is based on insights from the India Just Transition Summit, hosted by WRI India and the Just Transition Research Centre at IIT Kanpur. The summit convened over 250 policymakers, researchers, civil society members and community representatives to explore strategies for a people-centered low-carbon transition in India. Find more details here.