Infrastructure Debt Funds: Another Missing Piece in Circular Green Finance

Green finance has moved decisively into the centre of policy debate. Climate commitments—whether framed through Nationally Determined Contributions or net-zero targets—now shape investment priorities across emerging markets. A wide array of instruments has emerged: green bonds, blended finance, guarantees, multilateral and bilateral concessional loans, etc. Yet despite this expanding toolkit, delivery continues to lag ambition.

The constraint is no longer the absence of intent, but the absence of a financial logic that allows green capital to recycle and scale. Climate-aligned investments are characterised by front-loaded risk and long-lived benefits. Finance that remains locked in static structures long after risks have declined will inevitably constrain momentum. This is where circular finance, developed in earlier work, becomes central to green finance itself.

Infrastructure Investment Trusts, or InvITs, have already demonstrated how this logic can work on the equity side. But green finance is overwhelmingly debt-funded. Unless debt can also circulate, circularity remains incomplete. This is the space Infrastructure Debt Funds, or IDFs, were designed to occupy.

Debt as the Bottleneck in Green Finance
Most green infrastructure—renewable energy, low-carbon transport, water systems, resilient urban infrastructure—follows a predictable financial arc. Construction and early operations are risky; mature assets are stable and cash-generating. Banks and development finance institutions are well-suited to absorb early-stage risk, but they are poorly suited to hold low-risk, long-term assets indefinitely. Pension funds and insurance companies are exactly the opposite.

Yet in practice, green finance continues to treat debt as static. Bank loans are priced at financial closure and held for years even after risks have declined sharply. Equity may find exit routes through market instruments, but debt remains embedded on bank balance sheets. The result is balance-sheet congestion, higher cost of capital, and limited capacity to finance the next wave of green projects.

Circular finance demands that this debt bottleneck be addressed. If equity can be recycled but debt cannot, the system remains only partially circular.

IDFs as Debt-Side Circular Green Finance
Infrastructure Debt Funds were conceived precisely to solve this problem. Introduced in India in the early 2010s, IDFs were designed as take-out finance vehicles to refinance bank loans once projects became operational, extend maturities, and attract long-term institutional investors to de-risked infrastructure debt.

Although not framed explicitly as green instruments at the time, IDFs align closely with today’s green finance needs. They offer long tenors, declining risk exposure, and stable cash flows—exactly the characteristics sought by insurance companies and pension funds. Conceptually, they mirror what InvITs do for equity: enabling capital to exit mature assets and be redeployed into new ones.

On a limited scale, this logic was validated. IDFs refinanced operational road and power transmission projects with stable, annuity-like cash flows. Some domestic insurance capital entered infrastructure debt through IDF instruments. These transactions demonstrated proof of concept: refinancing reduced debt-service stress, lowered financing costs, and freed bank capital for redeployment.

But IDFs never became embedded in the green finance ecosystem.

Why IDFs Failed to Scale
The failure of IDFs was not a failure of circular finance logic; it was a failure of institutional alignment.

Banks price infrastructure loans at fixed interest rates that embed construction risk over the entire loan tenor. Once projects stabilise, banks continue to earn high, risk-loaded returns on assets whose economic risk has fallen sharply. In such a framework, holding on to good projects is rational; selling them is not. Banks were willing to part with stressed assets, but IDFs were never designed to absorb non-performing loans.

Refinancing also carried regulatory unease. Shaped by legitimate concerns over ever-greening, take-out finance came to be treated as an exception rather than as a normal stage in an asset’s life cycle. As a result, IDFs faced thin deal pipelines and hesitant investors.

InvITs, by contrast, benefited from a different narrative. Equity monetisation was framed as market development rather than balance-sheet weakness. Sponsors gained exits, investors gained confidence, and capital flowed. But InvITs were never designed to systematically recycle bank debt. Bond issuance by InvITs is episodic and ill-suited to pension and insurance funds that prefer diversified, intermediated exposure.

The result has been asymmetric circularity: equity moves, debt largely does not.

Re-integrating IDFs into Circular Green Finance
If circular finance is to support climate action at scale, IDFs must be repositioned as one operational layer within a broader circular green finance architecture, working alongside InvITs, guarantees, viability gap funding, blended finance, and climate-linked bonds.

The most critical reform is dynamic, risk-based pricing of green infrastructure loans. Banks should be able to charge higher interest rates during construction and see those rates step down automatically once projects stabilise. This would allow banks to harvest early risk premia while making it economically rational to exit mature assets. Refinancing would become routine rather than suspect—a shift that lies squarely within the remit of the Reserve Bank of India.

Second, refinancing must be explicitly legitimised within green finance policy. Clear criteria—completion milestones, revenue stability, independent credit assessment—can distinguish healthy refinancing from ever-greening.

Third, IDFs must be designed to interlock with other green finance instruments. Guarantees and viability gap funding address early-stage feasibility; blended finance absorbs first-loss risk; Masala bonds tap offshore rupee capital; InvITs recycle equity. IDFs sit between these elements, enabling debt to migrate as green assets mature.

One Missing Piece, Properly Placed
Infrastructure Debt Funds do not complete the green finance architecture. Other elements will continue to evolve and deserve equal attention. But without IDFs—or instruments that perform their function—the debt side of green finance remains trapped in linear structures.

InvITs have shown how equity circularity can work. Properly re-integrated, IDFs can do the same for debt. Recognising them as another missing piece in circular green finance is essential if climate ambition is to become financially deliverable.

Also read: A Just Energy Transition Needs Circular Finance