India’s climate finance taxonomy draft is a step in the right direction

In June 2025, the Government of India took a significant step towards bringing order to the chaotic but burgeoning world of green finance with the release of a Draft Climate Finance Taxonomy. Developed by the Union Ministry of Finance’s Department of Economic Affairs in collaboration with key stakeholders, including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Environment, Forest and Climate Change, the taxonomy aims to define what truly qualifies as “climate-aligned” financial activity in the Indian context. This initiative, though overdue, is critical for channelling capital into the right sectors and projects as India eyes a $10 trillion economy while staying on course with its net-zero commitments.

Climate finance has long suffered from ambiguity. Different stakeholders — from banks to investors to regulators — have lacked a common definition or benchmark to assess the sustainability of financial flows. Without a taxonomy, “greenwashing” remains a real risk: companies can exaggerate climate claims without regulatory repercussions. A standardised taxonomy, as seen in the European Union and other jurisdictions, ensures credibility, comparability, and accountability.

India’s taxonomy seeks to do exactly that — provide a common language and a credible yardstick to define and measure climate-positive investments. In doing so, it would help guide public and private financial institutions in aligning their portfolios with India’s nationally determined contributions (NDCs) and broader climate goals.

The key features of the draft taxonomy, as elaborated next, reveal its utility for India. Firstly, it recognizes the unique developmental needs of India. Rather than copy-pasting from Western models, it acknowledges the need for inclusive growth and just transitions. For instance, certain fossil-fuel-dependent activities may still be accommodated if they demonstrate a pathway toward decarbonisation. Secondly, unlike most taxonomies where emphasis is on mitigation, the Indian draft includes criteria for adaptation finance that are crucial for a country vulnerable to floods, heat waves, and erratic monsoons. Thirdly, while tailored to domestic priorities, the draft aligns with frameworks like the European Union’s Taxonomy, International Platform on Sustainable Finance, and G20 Sustainable Finance Working Group, improving its global credibility and interoperability. Lastly, the taxonomy is open-ended, allowing for the inclusion of new technologies and emerging sectors such as green hydrogen, battery storage, and carbon capture.

However, for the taxonomy to be truly transformative, some critical issues must be addressed. Firstly, the current draft is broad in several areas. Sector-specific thresholds like emissions limits or energy efficiency standards need to be more precise to ensure consistency in implementation. Secondly, merely having a taxonomy is insufficient. The government must link it with fiscal incentives, concessional lending, disclosure norms, and project approval processes. Regulators like RBI and SEBI should integrate the taxonomy into prudential norms and environmental, social and governance (ESG) reporting frameworks. Thirdly, as climate science and technology evolve rapidly, the taxonomy must be a living document, with regular updates through a permanent Climate Finance Standards Board or similar institution. Lastly, banks, non-banking financial companies, corporate borrowers and rating agencies need capacity-building and clear transitional guidance to avoid disruption. Small and medium enterprises (SMEs), which are often left out of climate finance frameworks, should be explicitly included.

Having a taxonomy in place is a strategic opportunity for India as it prepares to host the 33rd edition of the United Nations Framework Convention on Climate Change’s Conference of the Parties (COP33) in 2028. As the country aspires to become a global hub for climate technology and finance, having a credible, transparent, and dynamic climate finance taxonomy will be a major strategic asset. It will improve India’s access to international green capital, help de-risk investments in climate-resilient infrastructure, and reduce the cost of capital through credible green bonds and ESG instruments. Furthermore, by prioritising adaptation alongside mitigation, India can set an example for the Global South — proving that climate finance frameworks can be developmental, inclusive, and forward-looking.

To conclude, the draft Climate Finance Taxonomy is not just a technical document. It is a powerful tool of economic governance. Done right, it can channel billions of dollars into green jobs, sustainable cities, renewable energy, and climate-resilient agriculture. It is now imperative that the Government of India take this draft through rigorous public consultation, incorporate feedback, and operationalise it swiftly — not just to regulate finance, but to shape the future of sustainable development.

Shashvat Singh is a Senior Research Fellow at India Foundation; Muskan Chhabra is a Research Fellow at India Foundation

Views expressed are the authors’ own and do not necessarily reflect those of Down To Earth