India’s steel transition will require substantial investment over the coming decades. Steel producers will need to upgrade existing plants, use more scrap steel and renewable electricity, and invest in lower-emission production routes. Over time, this could include direct reduced iron using natural gas or green hydrogen, as well as carbon capture, utilisation and storage.

Banks are already central to financing investment in the steel sector. Steel companies rely on bank lending for capacity expansion and fixed assets, which means the transition will affect both banks’ existing exposure and future lending opportunities. 

As steelmakers make new technology and investment choices, banks will need to understand what these changes mean for borrower economics, credit risk and financing needs.

This is where transition finance becomes particularly relevant. Green finance typically supports investments that already qualify as environmentally sustainable under established green definitions or taxonomies. In hard-to-abate sectors such as steel, however, many investments that can reduce emissions substantially may not yet meet those thresholds. Transition finance can fund these interim investments when they form part of a credible pathway towards much lower emissions.

The G20 Transition Finance Framework, for example, emphasises that such activities should be part of a credible, time-bound transition plan with interim and long-term targets, technology pathways and investment plans. For banks, this means assessing not only the investment, but also how it fits within the company’s wider transition and whether that pathway is credible.

India is also developing its own approach. In May 2025, the Department of Economic Affairs at the Ministry of Finance published the draft Framework of India’s Climate Finance Taxonomy, covering both climate-supportive and transition activities. The draft is intended to reflect India’s climate goals, development priorities and transition pathway, with sector-specific criteria still to be developed for identifying activities that fall within each category. For steel, this could provide a more consistent basis for assessing investments across different stages of the decarbonisation pathway.

From transition finance recommendations to bank capacity

Through the India Green Steel Network (IGSN) Sustainable Finance Working Group, we identified transition finance as an early priority and developed recommendations on what could help scale finance for steel decarbonisation in India. These included clearer financial regulation, sector-specific taxonomies, credible corporate transition plans and financing instruments suited to different types of investment.

This work also raised a practical question: what do banks need to know when they assess financing requests from steel clients?

Working with auctusESG, we reviewed publicly available lending data across 11 major Indian banks and engaged financial institutions on their current practices and capacity needs. For 10 of the 11 banks, comparable absolute exposure data were available; their combined lending to steel was around ₹2.73 lakh crore (approximately US$31 billion) as of Q2 FY2025–26.

We also examined borrowing by five major Indian steel producers. Around two-thirds of their total debt came from domestic banks, with borrowing weighted towards longer-term structures used for capacity expansion and fixed assets.

These figures show why banks matter to the steel transition: they will be critical to financing new lower-emission investments, while also managing existing exposure to companies and assets that will need to transition.

The discussions also highlighted a changing context for steel lending. Banks already have exposure to emissions-intensive production routes, while steel producers are exploring lower-emission investments amid domestic measures such as India’s Carbon Credit Trading Scheme (CCTS) and international measures such as the EU Carbon Border Adjustment Mechanism (CBAM). 

This changing context, alongside issues around company transition plans, data and project bankability, informed the design of pilot capacity building workshops. These workshops were developed alongside auctusESG, and with the Council on Energy, Environment and Water (CEEW), Climate Policy Initiative (CPI) and RMI. They were held with two domestic banks: State Bank of India (SBI), India’s largest public sector bank, and IndusInd Bank, a major private sector bank.  More than 60 bank staff participated across credit, risk, sustainability, wholesale banking, project finance and related functions. 

Our theory of change is that stronger bank capacity, alongside enabling financial regulation and green industrial policy, can help banks assess and finance credible lower-carbon steel investments. Capacity building is the first part of this pathway, with the longer-term aim of bringing real projects to banks and enabling transition finance to flow.

The workshops were designed to translate these issues into practical lending considerations, and four themes came through clearly:

1. Climate risk is already a credit and portfolio question

The workshops looked at physical risks such as supply-chain disruption and infrastructure vulnerability, as well as transition risks arising from changes in policy, technology and markets. These risks can affect borrower competitiveness, credit quality and banks’ existing steel exposure.

At portfolio level, banks can also face concentration risk if several steel borrowers rely on similar production routes or face the same transition pressures.

But the transition also creates opportunities. Steel companies will need finance for energy efficiency, renewable electricity, greater scrap use, new production routes and supporting infrastructure. Better understanding of the transition can therefore help banks assess both existing risks and future lending opportunities.

2. Technology choices change borrower economics and financing needs

CEEW’s sessions covered the main options for reducing emissions from Indian steelmaking, including energy efficiency, renewable energy, greater scrap use, electric arc furnaces, direct reduced iron using natural gas or green hydrogen, and carbon capture, utilisation and storage.

The financing implications differ considerably across these technologies. Energy-efficiency measures can require relatively modest investment and reduce operating costs, while larger changes in production routes require new assets and supporting infrastructure. Green hydrogen remains relatively costly and at an earlier stage of commercial readiness, while carbon capture can involve high capital requirements and considerable uncertainty around technical and commercial feasibility.

auctusESG connected these technology differences to borrower economics and loan design. Higher capital costs, uncertain operating costs, longer construction periods or greater technology risk can affect cash flows, repayment capacity and bankability. Depending on the investment, this can have implications for loan tenor, covenants and whether guarantees or concessional capital are needed.

Different teams within banks may need different levels of technical detail, but they all need to understand how technology choices affect borrower risk, returns and financing needs.

3. Corporate transition assessment needs to look beyond targets

RMI’s corporate transition assessment session showed how banks can assess whether a company’s plans and investments are consistent with its stated transition goals.

The framework looks beyond headline targets to examine the company’s assets, investment plans, technology choices and the market and policy conditions affecting its transition. 

The steel case illustrated this through blast-furnace relining. Relining can extend the operating life of high-emitting assets by many years. A company may add lower-emission capacity, but if it continues to invest in and operate a large blast-furnace fleet, it can still lock in emissions and remain exposed to transition risk.

For banks, this means looking at where capital expenditure is going, which assets are approaching major investment decisions, and whether planned investments support the company’s wider transition pathway.

4. Transition considerations can fit into existing lending decisions

Rather than treating transition finance as a separate lending process, the workshops showed how transition-related questions can be built into processes banks already use.

At client engagement, relationship teams can discuss transition plans, planned capital expenditure and future financing needs. During credit assessment, teams can examine technology and execution risks, input assumptions, cash flows, repayment capacity and how the investment fits within the company’s wider transition plan.

Once financing is in place, monitoring can cover both financial performance and relevant transition milestones. At portfolio level, banks can also identify concentrations of exposure to production routes, technologies or transition risks.

Financing instruments also need to fit the borrower and the investment. An identifiable low-carbon asset may suit a use-of-proceeds structure, while a broader company-wide transition may be assessed against measurable performance targets. Instrument choice will depend on what is being financed, technology maturity and risk, borrower transition readiness and overall bankability.

One participant highlighted the value of covering these issues across the loan cycle and across business, credit and risk functions.

Capacity building is only part of the answer

Better internal capacity can strengthen bank lending decisions, but it cannot address every barrier to transition finance.

Credit decisions still centre on fundamentals such as profitability, debt serviceability and project bankability, and while banks are aware of developments such as CBAM and the growing focus on transition planning, the related transition risks are not yet consistently reflected in credit assessments.

Regulatory clarity also remains important, particularly on what qualifies as a transition activity and how credible company transition plans should be assessed. In India, the Reserve Bank of India’s (RBI) work on climate-related financial risk, the Securities and Exchange Board of India’s (SEBI) sustainable debt framework, and the development of the climate finance taxonomy could help provide clearer signals for financial institutions.

Experience elsewhere also shows how sector-specific guidance can help put transition finance into practice. In China, Hebei province’s steel-specific transition finance guidelines, issued in December 2023, set out eligible technologies and requirements for company transition plans. Climate Bonds Initiative reports that, by the end of 2025, steel companies in Hebei had secured more than US$6.9 billion in transition loans.

India will need an approach suited to its own steel sector and financial system. 

Banks also need reliable emissions data, asset-level information and capital expenditure plans from steel companies. Without these, it is difficult to assess whether company investment plans are consistent with stated transition goals.

Some technologies will require additional risk-sharing mechanisms before they can attract commercial debt at scale. Guarantees, blended finance and concessional capital can help address some of these risks. Stronger demand for lower-emission steel can also improve project economics.

Clearer guidance, better company information and appropriate risk-sharing mechanisms will determine how far stronger bank capacity translates into actual financing.

Looking ahead

The next phase of our work will move closer to the investments steel producers are considering, engaging them directly to understand the lower-emission technologies and projects they have in mind, their investment and borrowing needs, and the financing barriers they face.

We will map these financing needs against the capabilities and priorities of banks to identify suitable financing instruments and lending structures, as well as where risk-sharing mechanisms may be needed. Future capacity building can then be grounded more directly in real projects and financing decisions.

Participants also asked for more case studies, greater detail on policy and CBAM, and more examples of how transition finance is being applied in practice. Future sessions will build on this feedback with more time for borrower cases, transition plans and financing scenarios.

Lessons from banks and steel producers will also inform our engagement with policymakers on the regulatory signals, incentives and enabling conditions needed to support financing for the steel transition.