As India advances towards its ambitious climate goals, aligning financial flows with sustainable development objectives has become paramount. The recently released Draft Framework for Climate Finance Taxonomy is an important step to establish a unified framework to guide investments towards climate adaptation and mitigation measures. The Economic Survey 2023–24 estimated that India requires approximately $2.5 trillion for mitigation efforts by 2030. Adaptation financing estimates of $1tn by 2030 add further pressure, particularly for critical sectors such as agriculture, infrastructure and water resources.
India has made notable strides in mobilising climate finance. Sovereign Green Bonds (SGBs) have provided a credible avenue for raising funds. India’s first Carbon Credit and Trading System under the Emissions Trading Scheme in Surat incentivises low carbon emissions by trading emission permits. Last year, SEBI proposed the launch of ESG Debt Securities to help companies align financing needs with ESG targets.
Despite these, the absence of a unified taxonomy leads to inconsistent classification of green activities, limiting transparency and cohesion. This fragmentation has impeded capital flows towards genuine projects and failed to preclude greenwashing. A standardised taxonomy is essential to provide clarity to investors, prevent misallocation of resources and ensure that financial flows contribute meaningfully to India’s climate objectives.
The proposed framework adopts a structured approach to classifying economic activities that contribute to mitigation, adaptation and transition while maintaining coherence with India’s development trajectory. The taxonomy will follow a hybrid classification model incorporating both qualitative and quantitative dimensions. Climate supportive activities are split into two tiers based on absolute emissions avoidance and emission intensity reduction, while transition activities cover sectors where low emission alternatives are not currently viable due to technological or economic constraints.
The taxonomy initially covers seven critical sectors, including hard-to-abate industries like steel and cement. While it is a significant step, its success will depend on how well it is operationalised and mainstreamed across the financial ecosystem. The following recommendations can help India build a robust and inclusive climate finance architecture.
First, the draft taxonomy acknowledges the importance of interoperability with global taxonomies to prevent “green finance protectionism.” However, it is equally important for it to be interoperable with existing domestic frameworks such as the SGB Framework, SEBI’s BRSR Framework and RBI’s Framework on acceptance of Green Deposits, among others.
Second, to enhance transparency and investor confidence, all climate-related financial disclosures must be aligned with the taxonomy. To enable this, the framework must include the setting up of a public green registry for taxonomy-aligned projects. This will prevent overlaps in reporting to different agencies.
Third, public sector enterprises must lead by example in mainstreaming sustainable finance. Indian Railways, which ideally should have also been a focus sector, should mandatorily procure a percentage of low-carbon steel, even at higher costs, signalling commitment to green transition.
Fourth, to build investor confidence, the taxonomy should include setting up a specialised institution to act as a guarantor for corporates issuing green debt instruments. Such an institution may charge a fee from the issuer to ensure that the funds raised are used in green projects. The agency can also be responsible for penalising borrowers for missing their green objectives.
Fifth, the principles of circular economy must be embedded into the metrics developed to monitor “green” projects. For instance, it is critical to ensure that no component of a project or activity which mandates “absolute emission avoidance” introduces indirect or secondary emissions in the value chain that compromises its designated classification.
Sixth, the taxonomy must also include a monitoring and evaluation framework. This will enhance investor confidence.
India’s draft climate finance taxonomy has laid a foundation for aligning capital flows with climate priorities. More than a classification tool, the taxonomy must evolve into an enabler, steering public and private finance towards a greener and more resilient India. As global attention shifts to implementation, India’s taxonomy will need to strike a fine balance between credibility for investor confidence and flexibility to reflect India’s developmental realities. If well executed, it can catalyse not only financial innovation but also achieve the vision of a net zero circular green economy.
The authors are Co-Founders, Policy Consensus Centre. Views are personal.
