India Faces Climate Challenges Beyond Factories

India’s climate transition won’t be won in gigafactories, but rather in the “missing middle” of Micro, Small, and Medium Enterprises (MSMEs) that are often starved of credit. These businesses, including waste-to-energy firms, circular packaging startups, and EV component makers, play a huge role in GDP, jobs, and emissions.

Climate Finance and the Hourglass Problem

Climate finance in India is shaped like an hourglass, with billions of dollars flowing from institutional investors into infrastructure projects and microfinance reaching individual households, but the middle, where MSMEs operate, has been structurally abandoned. MSMEs account for roughly 30% of India’s GDP, nearly half its manufacturing output, and employ over 110 million people.

The challenge is not the absence of capital, but a mismatch between the capital that exists and the businesses that need it. Climate-focused MSMEs tend to be younger companies in evolving sectors without extensive credit histories, making it difficult for lenders to assess their risk.

The Problem of Unfamiliarity

Lenders often pass on these businesses not because they’re failing, but because the existing underwriting machinery simply wasn’t built for them. Many operate asset-light models, and their sectors lack established benchmarks, making it difficult for lenders to price risk.

Viable businesses are being turned away, not because they’re failing, but because the underwriting machinery wasn’t built for them. This is a paradox, as the companies best positioned to accelerate India’s energy transition are being excluded from the capital they need to do it.

Blended Finance and Alternative Lenders

Blended finance is a promising structural solution, where concessional capital from development finance institutions acts as a first-loss buffer, opening the door for private capital that would otherwise stay on the sidelines. India needs somewhere between $253 and $263 billion annually in clean energy investment through 2030, making these structures essential.

Equally important is channelling development capital through alternative lenders and Non-Banking Financial Companies (NBFCs) who are already embedded in MSME ecosystems and understand how to price risk in these sectors. Technical assistance, helping companies improve governance, data systems, and impact reporting, closes the loop by making borrowers more legible to capital markets over time.

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India’s climate transition is not just about reducing emissions, but also about creating a more sustainable and equitable economy. MSMEs are critical to this effort, as they can create jobs and stimulate local economies while also reducing their environmental impact. By supporting these businesses, India can create a more resilient and sustainable economy that benefits both people and the planet.

The bottleneck isn’t ambition; it’s distribution. The industry lacks the institutional will to deploy the necessary tools at scale. Development Finance Institutions (DFIs), banks, NBFCs, and alternative lenders each hold a piece of the solution. DFIs can anchor blended structures and absorb first-loss risk, while banks and NBFCs can extend reach through co-lending and green credit lines.

A Call to the Industry

Bridging this gap demands a collective shift in how the lending industry approaches risk. Underwriting climate MSMEs requires moving beyond collateral checklists and backward-looking credit scores toward forward-looking cash flow analysis and genuine sector expertise. The tools exist, but the industry lacks the institutional will to deploy them at scale.

The capital exists, and the demand is loud and visible. The industry owes these businesses, and owes the climate, a genuine reckoning with who gets left out when frameworks don’t evolve. MSMEs will not just participate in India’s climate transition; they will set its pace. The financial system must move fast enough to keep up.

They will play a significant role in India’s energy transition, and their success is key to the country’s sustainable future.

India’s toll policies also impact the MSMEs’ operations and logistics.