India’s Draft Climate Finance Taxonomy: The Missing Link in the Green Transition

India stands at a pivotal crossroads in its climate journey. As the world’s third-largest emitter and a rapidly growing economy, India’s vision for a “Viksit Bharat” (Developed India) by 2047 is deeply linked to how effectively it mobilizes and allocates climate finance. The recent release of the draft framework for India’s Climate Finance Taxonomy is not just a bureaucratic milestone - it represents a critical step toward aligning capital flows with the nation’s ambitious net-zero and climate adaptation goals. 

The Urgency of a Climate Finance Taxonomy in India’s Current Landscape

India’s climate finance landscape is at a critical juncture. The country faces an enormous gap between the funding required to meet its climate goals and the actual green finance flowing into the economy. According to estimates by The Landscape of Green Finance in India by CPI, India needs approximately $2.5 trillion in investments by 2030 to achieve its Nationally Determined Contributions (NDCs) under the Paris Agreement, with a longer-term net-zero target by 2070 requiring nearly $10 trillion in climate investments. However, current tracked green finance flows cover only about one-third of this requirement, highlighting a massive shortfall

Fragmented and Inconsistent Climate Finance Landscape:

India’s financial sector currently operates without a unified, standardized climate finance taxonomy. This absence creates several challenges:

• Banks and NBFCs struggle to consistently identify and finance genuinely green projects, leading to fragmented lending practices.

• The lack of clarity increases the risk of greenwashing, where investments claim environmental benefits without delivering real impact, potentially harming institutional reputations and causing financial losses.

• Inconsistent reporting and regulatory compliance due to a patchwork of voluntary guidelines increase operational complexity and costs, especially for smaller financial institutions.

• Difficulty in assessing and managing transition risks associated with India’s decarbonization goals limits strategic capital reallocation toward sustainable sectors.

• Reduced investor confidence hampers the growth of green finance markets, restricting access to both domestic and international capital.

These challenges slow the pace of green investments, misallocate capital, and undermine India’s climate ambitions. Establishing a robust, transparent climate finance taxonomy is therefore critical to enable banks and NBFCs to scale sustainable finance, manage risks better, and support a just and effective green transition

Growing Demand and Regulatory Momentum

India’s ambitious climate targets, including reducing emissions intensity by 45% by 2030 and achieving net zero by 2070, require a systemic shift in how capital is mobilized and deployed. The energy sector alone, aiming to double power generation capacity by 2032, with 87% from non-fossil sources, demands investments of over $350 billion. 

Recognizing this, key financial regulators such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are increasingly focused on creating a robust regulatory environment to deepen green finance markets, including green bonds and sustainable lending frameworks. 

Why India’s Climate Finance Taxonomy Is Urgent

A climate finance taxonomy provides a standardized classification system to clearly define which economic activities qualify as sustainable or transition-supportive. This clarity is urgently needed to: 

• Mobilize and direct capital effectively: Investors and financial institutions can confidently channel funds into projects that align with India’s climate goals, reducing the risk of misallocation.

• Prevent greenwashing: With science-based criteria and transparent metrics, the taxonomy will help verify genuine climate impact, building investor trust.

• Align domestic finance with global standards: This is crucial for attracting international climate finance and foreign direct investment, as global investors increasingly demand comparable and credible sustainability frameworks.

• Support a just transition: By including “transition-supportive” activities, the taxonomy acknowledges India’s unique developmental context, enabling sectors like steel and cement to progressively decarbonize without being excluded from finance

Understanding India’s Draft Climate Finance Taxonomy Framework: Key Takeaways 

The draft Climate Finance Taxonomy is a 32-page document that lays out the principles, objectives, and sectoral scope for classifying economic activities as climate-aligned or transition-supportive. It aims to guide investors, financial institutions, and policymakers by providing clear criteria to channel investments into projects that genuinely contribute to India’s climate goals.

Core Objectives of the Draft Climate Finance Taxonomy:

• Facilitate greater resource flow to climate-friendly technologies and activities.

• Support India’s net-zero emissions target by 2070.

• Help achieve a 45% reduction in emissions intensity from 2005 levels by 2030.

• Ensure 50% of electric power capacity comes from non-fossil sources by 2030.

• Prevent greenwashing by establishing transparent and science-based criteria

Key Features to Understand the Draft Climate Finance Taxonomy Framework:

The taxonomy classifies activities into two broad categories:

• Climate-supportive activities: Those that directly reduce emissions, enhance adaptation, or support relevant R&D.

• Transition-supportive activities: Projects that improve energy efficiency or reduce emissions intensity in sectors where full decarbonization is currently not feasible

Sectoral Focus	Power, mobility, buildings, agriculture, hard-to-abate industries (steel, cement, aluminium), MSMEs
Three Pillars	Mitigation (emissions reduction), adaptation (climate resilience), transition (decarbonization pathways)
Guiding Principles	Transparency, flexibility, indigenous technology promotion, and alignment with India’s developmental goals
Global Alignment	Incorporates best practices from the EU, UK, and international platforms, but tailored to India’s economy

Why This Taxonomy Matters for ESG and Sustainable Finance

For those in the BFSI industry, calculating and tracking their portfolio/financed emissions, and looking to improve their sustainable finance capabilities, India’s draft climate finance taxonomy offers a clear framework to:

• Track and measure climate-aligned investments with greater accuracy.

• Improve ESG performance by ensuring capital is directed to activities meeting rigorous sustainability criteria.

• Enhance transparency and reporting to meet growing demands from regulators, investors, and stakeholders.

• Mitigate greenwashing risks, protecting reputation and ensuring compliance

The Road Ahead: Implementation and Integration

The draft is currently open for public consultation until June 25, 2025. Its success depends on:

• Integration into financial regulations by RBI, SEBI, and other regulatory bodies to embed taxonomy criteria into lending and investment decisions.

• Development of detailed sectoral annexures that specify climate-supportive and transition-supportive activities and projects for each sector.

• Capacity building and data infrastructure to support robust monitoring, reporting, and verification of climate finance flows.

• Regular updates to keep pace with evolving climate science, technologies, and market dynamics.

• Incentives and market development to encourage adoption, especially among MSMEs, through simplified criteria and capacity-building support

The Missing Link in India’s Green Transition:

India’s draft Climate Finance Taxonomy is a foundational tool that can unlock trillions in climate investments, prevent greenwashing, and support a just and inclusive transition to a low-carbon economy. By providing a clear, science-based, and contextually relevant classification system, it addresses a critical gap in India’s climate finance ecosystem.

For investors, financial institutions, and businesses committed to sustainable growth, aligning with this taxonomy will be essential to navigating India’s evolving regulatory landscape and capitalizing on emerging green finance opportunities.

As India moves decisively toward its 2030 and 2070 climate goals, the taxonomy represents the missing link in its green transition - a framework that can transform policy ambition into tangible, measurable climate action.