India has taken a major stride toward climate-aligned development by releasing a Draft Climate Finance Taxonomy, a critical tool to define what counts as "green" in its economy. This taxonomy aims to mobilize capital flows towards sustainable activities and prevent greenwashing, while ensuring long-term access to affordable and reliable energy.
With this move, India joins a growing list of countries including the EU, UK, Singapore, Canada, and Australia developing national taxonomies to standardize climate finance.
India’s Climate Commitments at a Glance
• Net Zero by 2070: India aims to balance emissions and removals by mid-century.
• 45% reduction in emissions intensity (relative to GDP) by 2030 (compared to 2005 levels).
• 50% electricity generation from non-fossil sources by 2030.
• Estimated Investment Required: $2.5 trillion by 2030 for green infrastructure and energy systems.
What Is a Climate Finance Taxonomy?
A climate finance taxonomy is a structured classification system that:
•Defines which economic activities are climate-aligned
•Helps financial institutions identify, assess, and report green investments
•Ensures transparency and guards against greenwashing
•Supports policy alignment for sustainable development
Key Features of India’s Draft Taxonomy
1.Two Core Classifications:
To make it easier for investors, businesses, and regulators to identify which economic activities are genuinely climate-aligned, the draft taxonomy introduces two broad categories:
Climate-Supportive Activities These activities either reduce/avoid greenhouse gas emissions, or help communities and sectors adapt to the changing climate (like extreme heat, floods, droughts). These activities are essential to moving India toward its long-term goals like cutting emissions and building climate resilience.
Examples of Climate-Supportive Activities:
o Building solar or wind power plants
o Manufacturing electric vehicles
o Installing rooftop solar systems in homes or businesses
o Developing flood-resistant infrastructure or drought-resilient farming systems
o Investing in R&D for clean technologies (e.g., green hydrogen, battery storage)
Transition-Supportive Activities Not all sectors can go fully green overnight especially industries that are energy-intensive or have limited clean alternatives, like cement or steel. Transition-supportive activities may not be 100% green but help reduce emissions, improve efficiency, or lay the foundation for future decarbonization. These activities may not eliminate emissions entirely but are crucial stepping stones to help high-emission sectors move in the right direction, without halting economic development.
Examples of Transition-Supportive Activities:
o Upgrading cement plants to use energy more efficiently
o Replacing coal with natural gas or biomass as an interim fuel
o Using technology to capture and store emissions (Carbon Capture & Storage)
o Improving logistics and fuel efficiency in the transport sector
3.Sector Prioritization:
Taxonomy focuses on specific high-impact sectors that are either major contributors to greenhouse gas emissions or are critical to building climate resilience. The goal is to maximize the effectiveness of green capital by starting where it’s needed the most.
The framework initially focuses on:
1.Hard-to-abate industries: These industries produce high emissions and are technically difficult to fully decarbonize with current technologies. Covered Sectors:
oIron & Steel
oCement
2.Sectors with Mitigation and Adaptation Co-benefits (Cross-cutting sectors): These sectors can contribute both to reducing emissions and to adapting to the impacts of climate change. Covered Sectors:
o Power/Energy
o Mobility/Transport
o Buildings & Construction
3.Climate Adaptation and Resilience-Building Sectors (Adaptation-critical areas): These sectors are vulnerable to climate impacts and critical to ensuring food and water security for India’s population.
Covered Sectors:
o Agriculture
o Food Systems
o Water Resource Management
Science-based Approach:
o The taxonomy is aligned with international best practices but tailored to India’s socio-economic context.
o It sets technical screening criteria and thresholds for assessing sustainability.Policy Alignment:
o Integrates with India’s existing policy frameworks like the National Action Plan on Climate Change (NAPCC), Energy Conservation Act, and Renewable Energy Targets.
o Will support ESG disclosures and reporting requirements under frameworks such as SEBI’s BRSR (Business Responsibility and Sustainability Reporting).
Why This Matters to Stakeholders
•For Investors want to support climate-aligned projects but often face confusion about what truly qualifies as "green." The taxonomy gives a government-endorsed definition of sustainable activities, reducing the risk of greenwashing and helping investors confidently align portfolios with ESG goals and global climate targets.
•For Companies are under pressure to show real climate action but often lack clarity on what counts as sustainable. The taxonomy offers a clear roadmap for aligning operations with climate goals, helping firms attract green finance, comply with reporting frameworks like BRSR, and future-proof their business.
•For Regulators Without standard definitions, it’s hard for regulators to assess climate claims or enforce ESG rules. The taxonomy creates consistency in how sustainability is measured and reported, improving regulatory oversight, reducing greenwashing, and supporting development of green finance rules.
•For International Donors & Climate Funds Global financiers want assurance that their money supports real climate impact. By aligning with international standards, the taxonomy boosts transparency, comparability, and credibility making India a more attractive destination for climate capital.
Public Consultation Open
The Ministry of Finance has now invited public and expert comments on the draft until June 25, 2025. Download the draft and submit your feedback here.
This is a unique opportunity for stakeholders across sectors like finance, energy, manufacturing, agriculture to contribute toward shaping India’s green finance architecture.
What’s Next?
Once finalized, India’s Climate Finance Taxonomy is expected to:
• Influence investment decisions across banks, NBFCs, and capital markets.
• Be integrated into green bond frameworks, public financing instruments, and sustainable lending practices.
• Potentially inform sovereign green bond issuances and help track progress toward India's NDCs (Nationally Determined Contributions).
In parallel, the draft GHG Emission Intensity Target Rule, released under the Carbon Credit Trading Scheme, is another key development aimed at driving emissions reduction. It proposes setting sector-specific targets to limit greenhouse gas emissions per unit of economic output, aligning business growth with decarbonization goals. This rule will likely complement the taxonomy by reinforcing accountability and emissions tracking across sectors.
Conclusion
India’s draft taxonomy is more than just a technical document; it is a strategic tool for climate action and economic transformation. By clearly identifying what qualifies as sustainable, it can steer trillions in capital toward building a greener, more resilient India.
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