Steel is fundamental to India’s economic growth—it is vital for infrastructure, industry, and development. But it comes at a cost. As the largest industrial source of carbon emissions in the country, India’s steel sector is responsible for up to 12 per cent of national greenhouse gas (GHG) emissions. Without targeted action, these emissions could triple by 2050.

The good news? Financial innovation can drive meaningful change today. In this blog, we explore five ways transition finance, funding specifically designed to support emissions reduction in hard-to-abate sectors, can transform India’s steel industry. From unlocking capital for immediate emissions reductions to strengthening policy frameworks and corporate accountability, transition finance offers practical pathways that balance decarbonisation with economic competitiveness.

The government has taken important steps to set the sector on a greener path with the Ministry of Steel’s 2024 ‘Greening the Steel Sector in India‘ Roadmap and Action Plan and the newly introduced Taxonomy for Green Steel. But the sector needs more, it requires a comprehensive approach where finance plays a central role.

Transition finance is key to enabling this shift. While breakthrough solutions such as green hydrogen and direct reduced iron (DRI) will be critical in the long term, near-term emissions reductions depend on commercially viable technologies like energy efficiency upgrades and increased scrap recycling. These transitional solutions, though essential, often fall outside traditional green finance frameworks.

To help bridge this financing gap, the India Green Steel Network (IGSN) Sustainable Finance and Green Industrial Policy Working Group, led by Climate Policy Initiative and Climate Catalyst, has developed a discussion paper, that outlines actionable solutions for financial institutions, policymakers, and industry leaders to scale transition finance in India’s steel sector.

Here are five ways transition finance can accelerate decarbonisation in India’s steel sector:

Unlocking capital for near-term emissions reductions

Decarbonising steel production is a long-term process. But meaningful reductions can be achieved today. Transition finance allows steelmakers to invest in best-available technologies that lower emissions intensity, such as enhanced process efficiency, the use of high-quality iron ore, and partial carbon capture. These solutions are not yet fully zero-emission, but they reduce cumulative emissions and create conditions for scaling up breakthrough technologies.

Without targeted financial mechanisms, companies face cost barriers that delay much-needed investments. Transition finance bridges this gap, ensuring that steelmakers can act now while preparing for deeper decarbonisation in the future.

Tailoring financial instruments for the green steel transition

Existing sustainable finance frameworks primarily support projects that are already low-carbon or near-zero emissions. This leaves a gap for high-emission industries like steel, where transitional technologies are necessary but not classified as ‘green’.

Transition finance helps address this gap by offering financial instruments specifically designed to support emissions reductions in hard-to-abate sectors. These instruments include sustainability-linked bonds, transition bonds, and blended finance mechanisms, which provide capital for projects that lower emissions over time rather than achieving net zero immediately.

To be effective, these instruments should be linked to measurable emissions reduction targets, ensuring they contribute to long-term decarbonisation. This means setting clear key performance indicators (KPIs) at the entity or activity level, such as reductions in emissions intensity, adoption of cleaner production processes, or progress toward breakthrough technologies.

Strengthening industrial policy and financial regulations

Well-designed industrial policy is key to ensuring that transition finance flows at scale. Policy frameworks must address cost barriers, create incentives for early adopters, and establish a level playing field for low-carbon alternatives.

Key policy and regulatory enablers include:

• Well-designed green industrial policy frameworks that align financial incentives with decarbonisation goals.
• Financial sector regulations that direct capital towards lower-emission activities.
• Carbon pricing mechanisms that make high-emission steel production less competitive.
• Tax credits, subsidies, and incentives that reduce the cost of transition technologies.
• Green public procurement to increase demand for lower-emission steel.

Without clear policy signals, steelmakers and investors lack confidence in long-term decarbonisation strategies.

Expanding sectoral roadmaps and corporate transition plans

Sectoral and technology roadmaps—designed for India’s context—are essential for guiding investment and planning. Most global steel decarbonisation pathways align with net-zero by 2050, while India’s national target is 2070. The country’s rapid economic growth and resource constraints mean that its pathway must be tailored accordingly.

To mobilise transition finance, companies need clear, credible transition plans. Investors and financial institutions increasingly require businesses to set time-bound, science-based decarbonisation targets, and report on progress towards these targets through disclosures.

A robust corporate transition plan should include:

• Clear interim targets aligned with sectoral pathways.
• Detailed technology roadmaps showing how emissions will decline over time.
• Transparent reporting on progress and financial planning.
• Strategies to avoid stranded assets as policies and markets evolve.

Strong corporate transition plans increase investor confidence and ensure that financial institutions direct capital toward decarbonisation pathways rather than business-as-usual operations.

Mobilising leadership and accountability from the financial sector

For transition finance to scale effectively, financial institutions must set clear commitments that align with the steel sector’s decarbonisation pathway. Banks, investors, and lenders play a critical role in directing capital, yet many lack the targets, tracking mechanisms, and expertise needed to support steelmakers in their transition.

Key actions financial institutions can take include:

• Setting time-bound portfolio decarbonisation targets to align lending and investment with India’s steel transition.
• Tracking and reporting financed emissions using consistent, science-based methodologies to assess climate impact.
• Enhancing financial instruments such as sustainability-linked loans and transition bonds to incentivise emissions reductions.
• Developing expertise in transition finance through capacity-building programmes for banks, investors, and regulators.

By setting clear commitments and strengthening accountability, financial institutions can ensure transition finance flows at the scale and speed needed to support India’s steel sector’s decarbonisation.

Accelerating this transition and the way forward

India’s steel industry stands at a critical crossroads. The decisions made today will determine whether the sector can successfully decarbonise while maintaining global competitiveness and supporting India’s continued economic growth.

Transition finance offers a practical bridge between today’s carbon-intensive reality and tomorrow’s low-carbon future. By focusing on near-term solutions with measurable emissions reductions, we can make immediate progress while scaling the breakthrough technologies needed for deep decarbonisation.

Success requires collaboration across the entire ecosystem. Financial institutions must develop suitable instruments and set ambitious portfolio targets. Policymakers need to create enabling frameworks that incentivise low-carbon investments. Steel companies must develop credible transition plans with clear milestones and technology pathways.

The momentum is building. India’s steel sector has the opportunity to become a global leader in low-carbon production—creating jobs, reducing pollution, and strengthening energy security while addressing climate change.

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