India releases draft framework of Climate Finance Taxonomy #IndiaFinance

This will be a key enabler in India’s quest to achieve net zero by 2070, as well as energy security

To help the country assimilate and attract more funds related to climate-friendly technologies and activities, the Indian government announced a draft framework of India’s Climate Finance Taxonomy. It has invited feedback on the document from experts, industry stakeholders, and the general public until June 25, 2025.

First announced during India’s Union Budget 2024-25, the climate finance taxonomy will be a key enabler in India’s quest to achieve net zero by 2070, as well as energy security.

The definition of taxonomy is essentially arranging things into groups. A climate finance taxonomy, accordingly, will lend clarity to financial institutions, including banks, on what resources and projects fall under climate-friendly sectors, and are therefore eligible for funding.

In other words, this will help India clean up its economy, and also give investors confidence in investing in climate-friendly projects.

The draft highlight aspects which the taxonomy will cover, including mitigation, adaptation, and supporting transition of hard-to-abate sectors to low carbon. It also aims to prevent greenwashing — a deceiving tactic of presenting something as environmentally friendly when it isn’t.

Focus on mitigation, adaptation

According to the draft, clean energy will get a real boost once the taxonomy is in place, as will energy efficiency and reduction of emission intensity. These will fall under mitigation, including the overall reduction of greenhouse gas emissions.

Parallely, India will also be able to focus on adaptation projects like building climate-resilient infrastructure to lower climate impacts, sustainable water management practices, protection of vulnerable ecosystems, and regeneration and restoration of biodiverse systems, which are critical.

The draft has also classified industries and sectors into separate sub-groups. For instance, power, mobility, and buildings, construction will fall under climate mitigation, whereas agriculture, food and water security will be in the context of climate adaptation and resilience building.

Another sector that the draft gives high importance to are the hard-to-abate sectors like iron, steel, and cement. These sectors need to be transitioned, but as of now, commercially viable low-emission alternatives are not present. Therefore, right at the outset, activities in these sectors will aim to reduce emissions intensity, use less energy to align with India’s transition policies. Also, the draft addresses the need for innovation and R&D to come up with solutions for the transition to low carbon pathways for these sectors.

“Taxonomies serve as critical non-pricing mechanisms to combat greenwashing while guiding capital allocation. The launch of India’s draft climate finance taxonomy demonstrates this approach by bridging established green sectors with transition activities across the country’s complex economic landscape. The framework’s thoughtful accommodations for MSMEs and hard-to-abate industries fill critical gaps that several taxonomies have neglected,” says Shantanu Srivastava, sustainable finance and climate risk analyst at IEEFA.

Sectoral measures

MSMEs are a key player in the Indian industry, but being small in nature compared to big corporations, there are technological and resource constraints that these MSME players have to face. Borrowing to update technologies is also challenging for them, as they may not get loans at favourable interest rates due to their small size.

In the taxonomy draft, special emphasis is placed on this sector to streamline the process of ensuring cash flow. This will be done in a phased manner, simplifying criteria that will make MSMEs eligible for climate financing, reducing the burdens of compliance.

Furthermore, the taxonomy will address MSME-specific needs by establishing critical thresholds, which are optimal for MSMEs, and help invest in specific capacity-building efforts. As a result, MSMEs will have a larger participation in the Indian macro-economic scenario.

Another critical industry — agriculture — has not been omitted in the draft. Crucial for feeding the world’s largest population, Indian agriculture has mostly small, marginal farmers, who again, don’t have economic resources to adapt to climate-resilient agriculture. Rapid and continuous adaptation to a changing climate is very important, and the draft outlines this as the central theme of taxonomy for agriculture.

Beyond this, the draft has outlined eight principles. Some of them include following the climate action principles outlined by India — like the net zero goal by 2070, as well as Viksit Bharat, or developed India, by 2047. Transition activities will be given special attention, as well as promoting indigenous technologies which might have an edge in building climate resilience.

“Despite aiming for interoperability, the taxonomy may diverge from international taxonomies as we are focusing on India-specific climate goals, which is understandable. This could limit its acceptance by global investors,” says Labanya Jena, advisor, Climate Trends. The EU taxonomy, on the other hand, encompasses all member states of the bloc, ensuring direct investment reaches economic activities vital for green transition. It includes both financial and non-financial companies.

While some aspects will need improvement, the taxonomy draft has outlined two things clearly — reduction of emissions and emission intensity is crucial, and taking a solution-based approach is critical to solving India’s climate crisis. Or at least, making the country more risk-proof to climate change’s ill effects.

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