Why climate-focused AIFs are drawing serious LP money beyond ESG mandates

Climate-focused Alternative Investment Funds (AIFs) are rapidly emerging as a serious destination for long-term private capital in India, attracting not just ESG-driven money but mainstream allocations from high-net-worth individuals (HNIs), family offices and institutional limited partners (LPs). These funds, regulated under SEBI’s Alternative Investment Funds Regulations, 2012, are increasingly being viewed as vehicles to capture structural growth rather than niche impact plays.

Unlike mutual funds that invest largely in listed securities, AIFs pool private capital to back startups, unlisted companies and infrastructure projects. Climate-focused AIFs, in particular, target areas such as clean energy, electric mobility, water management and industrial decarbonisation—segments that require patient capital and offer high-risk, illiquid but potentially outsized returns.

The scale of interest is visible in recent fundraises. Climate Angels’ Category I AIF has raised around Rs 475 crore from over 150 LPs and invested in 19 startups spanning clean mobility, water and sustainability. Globally, TPG Rise Climate is targeting a $1 billion fund, with nearly 70% of its focus on Asia and India, and has already secured commitments of about $1.25 billion. Overall, India’s AIF industry has crossed Rs 15 lakh crore in commitments, underlining the growing role of private markets in funding long-term themes.

Regulatory changes have also strengthened the ecosystem. SEBI’s Second Amendment to the AIF Regulations in September 2025 introduced co-investment vehicles for Category I and II AIFs, reworked the Angel Fund framework and simplified norms for accredited investors. A subsequent amendment in November enabled a lighter regulatory regime for AIFs that cater exclusively to accredited investors. Category II AIFs are now also subject to dematerialisation of investments by October 2025, enhanced due diligence for concentrated LPs and expanded access to debt and unlisted securities. Together, these steps are aimed at improving transparency while encouraging capital formation in priority sectors such as climate finance.

According to Sandiip Bhammer, Founder and Managing Partner at Green Frontier Capital, the shift is being driven by dissatisfaction with traditional asset classes. “HNIs and family offices are reallocating capital because traditional assets are struggling to deliver consistent, risk-adjusted returns. Public markets feel overvalued and cyclical, whereas private markets offer access to structural growth themes with better governance and downside protection,” he said. AIFs, he added, allow LPs to participate earlier in value creation, where long-term wealth is increasingly being created.

Importantly, climate-focused AIFs are no longer being assessed as standalone ESG allocations. “Among sophisticated LPs, climate AIFs are now evaluated alongside mainstream venture and private equity funds,” Bhammer said. The focus has shifted to fundamentals such as scalability, capital efficiency and exit visibility, with climate seen as a cross-sectoral opportunity rather than a purely impact-driven bet.

Misconceptions, however, persist. One common belief is that climate investing requires a trade-off between returns and impact. “In India, climate technologies are being driven by economics—cost competitiveness, regulation and supply-chain shifts,” Bhammer said, adding that many segments are already scaling and the bigger risk may be entering too late.

Over the next five years, LP capital is expected to flow most aggressively into energy transition infrastructure, electric mobility and financing, battery storage, industrial decarbonisation and climate-resilient agriculture—areas where decarbonisation aligns with national priorities and clear commercial outcomes. As India pushes towards its net-zero goals, climate-focused AIFs are increasingly becoming a core private-market allocation, not just an ESG add-on.