Taxonomy for climate finance remains the missing link in India’s green transition #IndiaFinance

In her July 2024 budget speech, India’s Finance Minister Nirmala Sitharaman announced, “We will develop a taxonomy for climate finance for enhancing the availability of capital for climate adaptation and mitigation.” Many expected her to provide a deadline for it in the 2025 budget, but no such mention was made.

Though Sitharaman remained silent in her February 1 budget speech this year, budget documents reveal that work on drafting a taxonomy for climate finance — a framework to classify sustainable economic activities and guide green investments — is ongoing.

The 2025 budget document offers some details on progress. A concept note has been circulated to ministries and national and international organisations for feedback. Based on the inputs received, a detailed framework is now being prepared. The budget document reveals that the government is currently targeting six sectors, with sectoral technical committees working on power, mobility, building, agriculture, food and water security, and hard-to-abate industries.

While no official announcement has been made, a person involved in drafting the framework and represents an international organisation, said that the government aims to release the first draft by March 31, which has been communicated to those working on the draft. The person requested anonymity as they are not authorised to speak publicly on this.

Read more: Budget prioritises resilience and energy security, skips major green announcements

The green filter

The impacts of climate change are visible globally, and addressing the crisis requires massive financial resources. According to the Climate Policy Initiative (CPI), an estimated $8.5 trillion in climate finance is needed annually until 2030, increasing to over $10 trillion from 2031 to 2050. CPI is an independent non-profit research group.

India is already experiencing the financial strain of climate adaptation. The Economic Survey, tabled on January 31, highlighted that adaptation-related expenditure was 5.6% of the country’s GDP in 2022, up from 3.7% in 2016. Meanwhile, the limitations of public finance were evident at COP29, where countries pledged just $300 billion for the New Collective Quantified Goal (NCQG) by 2035 — a fraction of the required funding. In this scenario, private finance becomes crucial.

“Private investors, particularly international, are increasingly drawn to green initiatives, but they seek clarity on whether the sectors they invest in are genuinely sustainable,” said Suranjali Tandon, Associate Professor at the National Institute of Public Finance and Policy (NIPFP).

This is where climate finance taxonomy plays a critical role. A taxonomy is a set of guidelines that helps investors and institutions allocate funds toward activities that address climate change. Tandon explained that it provides a framework to distinguish between what qualifies as green or sustainable.

The Indian government has acknowledged the need for such a framework. Recently, Rajasree Ray, Economic Advisor at the Ministry of Environment, Forest, and Climate Change (MoEF&CC), stressed that a climate finance taxonomy is essential for classifying which economic activities can be marketed as sustainable investments. She explained that it guides investors and banks in channelling trillions of dollars into effective climate solutions.

In her 2024 budget speech, Finance Minister Sitharaman had also emphasised that taxonomy will enhance the availability of capital for climate adaptation and mitigation, supporting India’s green transition.

A growing global trend

Recognising the role of green taxonomy in mobilising climate finance, countries worldwide are rapidly adopting these frameworks. China was the first to introduce a green taxonomy in 2015. The European Union (EU) adopted its Taxonomy Regulation in 2020. Since then, Singapore, Mexico, South Africa, Colombia, South Korea, Thailand, and others have followed suit. Pakistan became the latest entrant, releasing a green taxonomy draft in February 2025.

According to a World Bank report, 47 sustainable finance taxonomies have been issued globally as of April 2024. However, there is a clear divide. “While three-quarters of advanced economies are now covered by a national or regional sustainable finance taxonomy, just over 10% of emerging markets and developing economies are covered. This could slow their ability to attract capital looking for sustainable investment opportunities,” it said.

As the urgency of climate finance is felt worldwide, countries are also learning from one another. Neha Kumar, Head, South Asia at Climate Bonds Initiative (CBI), said that countries are learning from each other as many more of them are getting engaged with taxonomy development.  “The approach developed by the EU seems to be getting embedded in most of the latest taxonomies. EU taxonomy’s three key principles- making a substantial positive contribution to climate or environmental goals, ensuring no significant harm to other priorities, and meeting minimum social and governance safeguards- are also recognised widely. Taxonomies are also integrating screening mechanisms to qualify activities like steel and cement decarbonisation for which green alternatives may not be currently available but can transition to net zero.  CBI is an investor-focused non-for-profit organisation working to mobilise global capital for climate action,” she said.

Meanwhile, Shubhashis Dey, who has served on numerous high-level committees, including his current role on SEBI’s ESG advisory committee, noted that the absence of a taxonomy may not pinch India at present, as foreign investment inflows have already declined due to various local and global factors. However, he warned that if India is not prepared with clear guidelines when global capital flows into sectors like cleantech, investors may simply look elsewhere. Dey was part of the Taskforce on Sustainable Finance (TSF), which submitted the draft of a green taxonomy in 2021.

A stretched process

The journey to draft a taxonomy for green finance began in 2020 when the Ministry of Finance established the TSF. A team of experts submitted a draft framework in 2021, which was shared with multiple ministries for feedback. While some ministries provided inputs, these were never incorporated into the draft, according to Shubhashis Dey, who was part of the task force.

This period coincided with India’s preparations for its G20 presidency, which began on December 1, 2022. Despite the initial momentum, the draft was never made public. Now, after a fresh announcement in the July 2024 budget, the government has resumed work on a new draft, started in November 2024, said the expert involved in drafting the framework.

Another finance expert who was part of the earlier Taskforce on Sustainable Finance representing an international organisation stated that creating a taxonomy requires coordination with various stakeholders. “When we prepared the first draft in 2021, much of the effort went into securing consensus from line ministries and industry stakeholders. A taxonomy must gain broad societal acceptance to be effective,” the expert, who has since changed organisations and is not authorised to speak to the media, said on the condition of anonymity.

Kumar highlighted the varying approaches to taxonomy globally. For instance, the European Union’s taxonomy is explicitly green, while some emerging economies include both environmental and social objectives, he said. “India’s focus on starting with climate finance taxonomy is a much-awaited policy signal and start. Fundamentally, its framework needs to be scientifically robust and implementable.”

Dey also pointed out a similar evolution. He said the first draft was prepared before the Glasgow climate summit, where Prime Minister Narendra Modi announced India’s 2070 net-zero target. With the announcement, the threshold of all the calculations gets changed. All estimates regarding the economy and energy transition need to consider this deadline. However, the process remains challenging, requiring careful consideration of India’s unique economic and social context.

In the absence of a taxonomy for climate finance, the classification of green activities remains fragmented, with different organisations releasing their classification for different purposes. For instance, the Reserve Bank of India (RBI) introduced a framework for green deposits in 2023, and the government of India, in 2022, released a framework for Sovereign Green bonds (SGrB), in which it defines the ‘green’ sector.

Need for a disclosure framework

Experts Mongabay India talked to emphasise that creating a taxonomy alone will not be sufficient unless mechanisms are established to address issues such as greenwashing. They highlight the need to develop a disclosure framework alongside the taxonomy. “It is crucial to ensure stakeholders adhere to the taxonomy in both letter and spirit. It will reduce the chance of greenwashing,” said Tandon from NIPFP.

Kumar from CBI stressed that ultimately alignment with taxonomy will need to be supported by disclosures, which are verifiable, to reduce greenwashing. “This will foster smoother finance flows based on a robust common language for international and domestic investors alike.”

Kumar also said that the upcoming taxonomy should fill the important missing piece in India’s fast-evolving sustainable finance landscape, guiding finance for climate transition credibly.

China and the EU have both developed disclosure frameworks. However, a source confirms that the government is not currently working on such a verification or disclosure framework, raising concerns about the effectiveness of the taxonomy in its current form.

Read more: Latest RBI guidelines to help mobilise domestic capital towards green activities

Banner image: Agriculture is one of six sectors the Government of India is working on for its climate finance taxonomy, says the 2025 budget document. Image by Digvijaysjanoti via Wikimedia Commons (CC-BY-SA-4.0).