India’s 2025 Climate Finance Taxonomy: What Investors and Policymakers Need to Know

What is a Climate Finance Taxonomy?

A ‘climate finance taxonomy’ is essentially a set of objective criteria to judge whether a company’s activities are “green”, particularly relevant in the context of investing. In the absence of climate finance taxonomies, determining if an activity is “green” is difficult as definitions vary across regions, industries, and sectors. A taxonomy gives investors a consistent green label for assets and projects, helping them screen investments, design products, and monitor risk using science-based and transparent criteria. This lowers transaction costs and mitigates greenwashing. 

Since the European Union (EU) introduced its landmark Taxonomy Regulation in 2020, the global landscape for sustainable finance standards has rapidly expanded. China followed with its revised Green Bond Endorsed Project Catalogue, and numerous other jurisdictions like Japan, France, Indonesia, Singapore (with its Singapore-Asia Taxonomy) and Malaysia have since launched or developed their own taxonomies, each tailoring frameworks to their national priorities. Regional initiatives like the ASEAN Taxonomy also consolidate a trend towards harmonising sustainable finance across borders. India’s recent Draft Framework of Climate Finance Taxonomy (Draft Framework) released on May 7, 2025, is the latest in this global movement promoting climate investing. Public consultation is open on the Draft Framework till June 25, 2025, and can be emailed to aditi.pathak[at]gov[dot]in with the subject “Comments on the Draft Framework for the Taxonomy”. 

Key Ideas in the Draft Framework

The approach to develop an Indian climate finance taxonomy (Taxonomy) will take place in two phases: the first will develop the foundational framework to an Indian climate finance taxonomy. The second phase will involve classifying climate-supportive activities and transition-support activities, measures and projects. The Taxonomy will be split into two parts: a broad framework, which will be reviewed regularly, and annexures that will go into the details of specific sectors. The Draft Framework aims to lay out the qualitative principles that will govern how the sectoral sections are prepared. 

The objectives of the Taxonomy are to:

1. Facilitate greater resource flows

2. Prevent Greenwashing 

3. Be consistent with India’s developmental goals under Viksit Bharat @ 2047

4. Cover technologies, measures, projects and activities aligned to (i) Mitigation (ii) Adaptation (iii) Support transition of hard-to-abate sectors 

A key idea is that a contextual document like a climate finance taxonomy must at all points reflect a country’s specific economy. Hence, the Taxonomy is constructed to be highly dynamic as a “living framework”. It aims to balance interoperability and alignment with international standards, while also being specific to India’s cultural, geographical and economic context. Another standout feature of the Draft Framework is that, in addition to climate mitigation, it also leads on climate adaptation. Most taxonomies tend to focus on climate change mitigation instead of adaptation due to an ambiguity in what constitutes a climate adaptation investment. The effect of this is generally that adaptation projects are underfunded. However, the Draft Framework also has principles to classify adaptation and resilience measures. This is especially important given India’s vulnerability to climate impacts, and has been done in accordance with ODI’s advice. 

Primary Principles in the Draft Framework

The eight core principles espoused in the Draft Framework are as follows:

1. Consistency with India’s stated position on climate action and development priorities: The Taxonomy will classify activities on the basis of their alignment with India’s Nationally Determined Contributions (NDCs), target for Net Zero carbon emissions by 2070, country-determined transition pathways and Viksit Bharat @ 2047 ambitions (i.e., to become a developed country by 2047 specifically including energy security for all). 

2. Focusing on pathways and trajectories in an India-specific context: Classification will be contextual to India’s circumstances and recognise that immediate compliance with stringent standards will not be possible in the short run or for all sectors equally. 

3. Interoperability and consistency with other taxonomies: The Taxonomy will be aligned with international frameworks and taxonomies, but with flexibility given in the context of (i) India’s specific circumstances (ii) development priorities, and (iii) national climate goals. 

4. Support Transition Activities: There is specific intention to facilitate investment in sectors through dynamic and inclusive classification. This includes recognising and supporting sectors critical to transition. These sectors will form the annexures of the Taxonomy. 

5. Promoting the use of Indigenous technologies: The Taxonomy will incentivise research, development and adoption of indigenous technologies.  

6. Be science-based and transparent: The Taxonomy will have classifications supported by clearly defined and disclosed metrics. This means having clear principles for inclusion in climate mitigation or climate adaptation projects. For example, avoiding greenhouse gases (GHG), reducing GHG or carbon emission intensity, enhancing GHG removal, long-term storage of GHGs would be the criteria for climate change mitigation. For adaptation and resilience, activities that increase resilience and reduce risk/vulnerability to climate hazards, while reducing or preventing the adverse impact of current and future climate risks on the activity itself, nature, assets or people will be identified. 

7. Proportionality (Support for MSMEs): The Taxonomy will have provisions to ensure that MSME resource flows are not adversely impacted, i.e., the potential inability of most MSMEs to be able to meet the requirements of the Taxonomy should not impact their eligibility to financing opportunities or leave them disadvantaged in their funding. This includes developing a simplified and proportionate criteria for MSMEs to facilitate their inclusion into the climate finance framework

8. Do no significant harm to other objectives of the climate finance taxonomy: This might involve developing safeguards that prevent disproportionate or adverse effects on other climate objectives.  

The Draft Framework also widely draws from the climate finance taxonomies in the EU, ASEAN, China, SA, IPSF-UNDESA, G20 Sustainable Finance Working Group, Malaysia, Indonesia etc.

Structure of India’s Climate Finance Methodology

Activities are divided into Climate-Supportive activities and Climate-Transition activities. 

Climate Supportive Activities are defined as activities, projects and measures that contribute to the Draft Framework’s objectives (including through research and development) by avoiding or reducing GHG emissions, improving energy efficiency, or adapting to climate risks. These activities are divided into two tiers: Tier 1 includes efforts that completely avoid emissions (like using non-fossil fuel sources) and activities for climate adaptation and resilience. These are emission-reducing activities that have key indicators of success and have clearly defined pathways to reach certain prescribed emission intensity targets. Tier 2 includes activities that contribute to a reduction in emission intensity and have defined pathways for further improvement. This also includes activities that reduce emissions or improve adaptation, but may still produce some emissions due to current technology limits.

On the other hand, Climate Transition Activities are projects that improve energy efficiency or lower emissions in industries where completely avoiding emissions is not yet possible because better technology does not exist. These activities help move those sectors toward a cleaner future over time, recognising that many sectors require a slower shift to sustainability. Transition sectors will be determined in accordance with government policies. This approach to classification, including qualifying criteria for an activity to be considered part of either category, is further detailed in Section 5 of the Draft Framework. 

Sectors Identified in the Draft Framework 

The Draft Framework outlines a set of priority sectors that will be formally added as annexes to the framework over time. Designed as a living document, the taxonomy will expand dynamically, aligning with India’s evolving climate and development priorities under the vision of Viksit Bharat @ 2047. The sections identified currently are power, mobility, buildings, agriculture, and hard-to-abate industries like cement, steel and iron.

Power, as electricity, is the backbone of industry, agriculture, and livelihoods and is central to India’s low-carbon transition. The taxonomy promotes a balanced energy mix across renewables, thermal, nuclear, and hybrid sources. 

The mobility sector, responsible for over 13% of energy emissions in 2020, is expected to grow rapidly in the coming years. While several programs are already pushing for cleaner transport, the taxonomy seeks to accelerate this shift by supporting less carbon-intensive energy sources and sustainable transport systems.

Similarly, the buildings sector is being steered toward efficiency and sustainability through green building standards like GRIHA, which have become mandatory for government and public sector buildings.

In agriculture, climate vulnerability remains a critical concern, despite the sector contributing 16% of GDP and employing over 46% of the population. The Taxonomy highlights the need for resilience-building investments in agriculture, especially as studies show climate change could significantly reduce yields of major crops without adaptation. 

Meanwhile, hard-to-abate sectors like iron, steel, and cement - vital to infrastructure but high in emissions - will be a key focus. The key challenges here are the capital-intensive nature of such industries, a lack of R&D in reducing their emissions intensity in long-enduring practices in the sector. The Taxonomy aims to direct finance toward developing low-emission technologies, scaling mature solutions, and building domestic expertise, with future inclusion of other sectors such as aluminium and fertilisers.