Why green taxonomy notification is key to India’s climate finance push  

Over the last few years, various initiatives have been undertaken to strengthen sustainable finance, but experts find substantial gaps still persist. The Economic Survey this year, for instance, noted that the gap between sustainable development ambitions and available financing has continued to widen, especially in developing countries, and is now estimated at around $4 trillion. 

The lack of a published, legally operative green taxonomy as experts say from an Indian perspective is a speed bump and any efforts on that front could go a long way in giving climate finance a real lift in the country. The country has ambitious targets to reduce its carbon emissions over the next few decades. 

A climate finance taxonomy is essentially a standardised classification, which clearly defines which projects or assets or activities can be considered green or sustainable. 

The Union finance ministry came out with a draft framework for India’s Climate Finance Taxonomy in 2025. If India notifies its climate finance taxonomy by 2026, it will be a transformational event — comparable in significance to the sovereign green bond programme launch in 2023, feels Nikunj Dube, Chief Ratings Officer, CareEdge-ESG. 

“The taxonomy will unlock private sector participation in sectors that currently lack clarity, accelerate blended finance structures, and give DFIs (development finance institutions) and global investors the definitional framework they need,” he told Business Today. 

India’s sustainable finance market has been growing in the last few years, with green bonds being the key driver. Cumulative green, social, sustainability and sustainability-linked (GSS+) debt issuances rose 186% over 2021-24 to $55.9 billion. However, that is significantly lower than the $1.3 trillion that will be needed by 2030, said Dube. 

India is now the fourth largest emerging market for GSS+ debt. But neighbouring China is ten-times bigger with cumulative sustainable bond issuances at $555.5 billion, he noted. 

“The absence of a nationally notified green taxonomy creates ambiguity—for issuers who do not know what qualifies as green, for investors who cannot independently verify claims, and for regulators who cannot enforce standards without a legal definition,” Dube said. 

Lack of a deep investor base is another issue that he points out. 

“India's domestic institutional investors — insurance companies, pension funds, mutual funds — are governed by mandates that do not explicitly reward or incentivise green investments. Without institutional mandates or regulatory incentives linking green instruments to portfolio requirements, sustainable instruments must compete on yield alone, which is structurally disadvantageous,” stated Dube. 

Apurva Rathod, company secretary and chief sustainability officer at L&T Finance, also said that India still lacks a common definition of what counts as a 'green' loan, making it hard for lenders to build green portfolios with confidence. Currently, every lender defines 'green' differently, and that makes it difficult to measure real outcomes, according to Rathod. 

“Many rural and semi-urban borrowers do not understand green finance products, and many lenders do not have the tools to assess climate risk properly. Regulators, industry bodies and financial institutions all need to invest in fixing this together,” she said. 

She also called for better risk-sharing. blended finance structures, and more active involvement from development finance institutions to bring in private capital.