Green Finance Is Solving the Wrong Problem

As the global climate process turns toward implementation ahead of COP31, there is a growing recognition that the debate on green finance, while increasingly sophisticated, remains misdirected. For countries like India, which must simultaneously scale infrastructure and manage fiscal constraints, this moment presents not just a challenge but an opportunity to reshape the framing of the global financing agenda.

Over the past decade, the emphasis has been clear: mobilise more capital, crowd in private investment, and develop new financial instruments to support the transition. The result has been an expanding toolkit—green bonds, blended finance, carbon markets, sustainability-linked instruments—each presented as a critical part of the solution. Yet, despite this proliferation, the gap between ambition and financing remains stubbornly large.

This suggests that the problem is not a lack of innovation but a misdiagnosis. We have come to view the challenge primarily as one of mobilising capital, when in fact it is equally—if not more—about how capital moves. By focusing on instruments in isolation, we risk losing sight of the system in which they operate—a system that, at its core, remains designed around a linear view of finance.

System That Misreads Risk
At the heart of the issue is a simple but often overlooked reality: infrastructure risk is not static. It evolves—and typically declines—over time. In the early stages of a project, uncertainties around construction, demand, and regulation are significant. But once assets become operational, these risks diminish, revenues stabilise, and performance becomes more predictable.

Yet financial structures are not designed to reflect this transition. Capital is committed at the outset and tends to remain embedded even as the risk profile changes. Public capital often stays invested long after it has served its catalytic role. Banks continue to hold assets that have effectively stabilised, while long-term institutional investors—better suited to such assets—remain under-participative.

The result is a system that continues to price yesterday’s risks and, in doing so, constrains tomorrow’s investments.

The Missing Middle in Capital Flows
This structural weakness is most visible in the “missing middle” of infrastructure finance. Much of the policy effort has focused on facilitating entry, while progress has also been made in developing instruments that can absorb stable, operational assets.

What remains underdeveloped is the transition between the two.

There is no smooth pathway that allows capital to move as risk declines. Capital that enters early often remains locked in, while capital that would enter later does not find assets that meet its requirements. The system, in effect, stalls in the middle.

Risk in the Wrong Hands
This gap has important consequences for how risk is distributed. Governments end up carrying risk longer than intended, often through explicit or implicit support. Banks retain exposures that no longer align with their balance sheets, while institutional investors face a shortage of investible, de-risked assets.

The issue, therefore, is not simply that risk is high, but that it is held by the wrong actors for too long. This misallocation raises the cost of capital, constrains new investment, and places additional pressure on public finances.

When Instruments Solve the Wrong Problem
Seen in this light, the proliferation of financial instruments begins to look less like a solution and more like a partial response. Blended finance enables projects to get off the ground but does little to facilitate exit. Green bonds are well-suited to stable assets but depend on a pipeline that is often missing. Carbon markets may improve project economics, but do not address how capital transitions over time.

Each instrument solves a problem—but often at a different stage, and without being connected to a larger system. What is missing is not innovation, but integration.

From Projects to Lifecycles
What is needed, therefore, is a rethinking of the architecture itself.

The idea of circular finance provides a useful way to think about this. Rather than treating infrastructure as a series of discrete investments, it views it as a lifecycle through which different forms of capital must move. Public or concessional capital enters at the early, high-risk stage; as risks decline, it exits, making room for private investors. Once assets stabilise, they transition into capital market vehicles that can be held by long-term institutional investors. The capital released is then redeployed to new projects.

In this way, financing becomes a continuous process rather than a one-time allocation.

Lessons from Experience
Elements of this approach are already visible in practice. In India, Infrastructure Investment Trusts have enabled operational assets to access capital markets, attracting institutional investors and creating exit pathways for sponsors. At the same time, earlier efforts such as Infrastructure Debt Funds did not scale as expected—not because the concept was flawed, but because incentives, regulation, and market structures were not sufficiently aligned.

The lesson is clear: capital will move only when the system allows it to.

Why Information Matters
There is one final, often underappreciated constraint—information.

Capital does not move merely because financial structures permit it. It moves when investors are confident that risk has declined in a credible and measurable way. That confidence depends on reliable, timely, and verifiable information on asset performance.

Without such information, investors remain cautious, and capital remains where it is. Strengthening data systems and transparency is therefore central to enabling capital mobility.

From Linear to Circular Finance: An Agenda for COP31
As COP31 approaches, the global conversation is beginning to shift—from how much finance can be mobilised to how it can be deployed effectively. This is a necessary shift, but it remains incomplete.

The deeper issue is that the global financial architecture itself remains fundamentally linear.

Multilateral development bank lending frameworks are structured around project-based financing rather than lifecycle transitions. Banking systems, shaped by prudential norms, tend to discourage refinancing and capital recycling. Capital market regulations in global financial centres continue to price risk in static terms. Credit rating methodologies reinforce this by relying on point-in-time assessments. Long-term institutional investors operate within frameworks that favour stability but are insufficiently connected to earlier stages of asset creation.

Taken together, this architecture reinforces a model in which capital enters and remains, rather than one in which it moves and recycles.

This is why the challenge in green finance cannot be solved through instruments alone. As long as the underlying architecture remains linear, efforts to scale climate finance will continue to face structural constraints.

What is required is a transition—from linear finance to circular finance.

At one level, elements of this transition will emerge within national systems. India’s experience with Infrastructure Investment Trusts and Infrastructure Debt Funds represents an early attempt to enable capital recycling. Other countries will evolve their own institutional pathways.

But for circularity to operate at scale, it must be embedded in the global financial system. Multilateral development banks will need to move beyond one-time project lending toward lifecycle financing. Regulatory and prudential frameworks must enable asset transition. Credit rating systems must better reflect declining risk. Capital market regulations must facilitate the movement of assets across risk categories.

Without these shifts, domestic innovations will remain partial, and capital will continue to face friction as it moves across institutions and borders.

For countries like India, this creates both an imperative and an opportunity. The challenge is not only to mobilise capital, but to ensure that it flows efficiently. As COP31 approaches—and in parallel forums such as the G20, BRICS, and the boards of multilateral institutions—India can play a pivotal role in placing this issue at the centre of the global agenda.

The next phase of the global financing agenda must therefore move decisively—from designing instruments to redesigning the system itself.