Harsimran Sandhu
Finance Minister Nirmala Sitharaman, in her 2025 Budget, reaffirmed the government’s strong commitment to developing a comprehensive taxonomy for climate finance.
While the process is still ongoing, the structured framework being established reflects the government’s dedication to fostering sustainable investments in India.
A well-defined taxonomy will provide essential guidelines to determine what qualifies as a “green” investment, reducing ambiguity and ensuring efficient capital allocation toward impactful projects. This initiative will not only help prevent greenwashing but also enhance investor confidence in contributing to India’s green growth.
Economic Affairs Secretary Ajay Seth recently confirmed that the comprehensive taxonomy exercise is expected to be completed within the next six months. With this clear direction, India is positioning itself as a leader in climate-conscious financial markets, attracting sustainable investments for the long term.
Framework in Progress
A climate finance taxonomy serves as a classification system that defines environmentally sustainable economic activities. It provides a roadmap for investors, banks, and financial institutions to direct funds toward legitimate climate-friendly projects rather than those merely claiming to be green.
Furthermore, with the EU set to enforce the Carbon Border Adjustment Mechanism (CBAM) by 2026, India risks losing its competitive edge in sectors like steel and aluminium unless it swiftly aligns its financial regulations with global standards.
To meet India’s Nationally Determined Contributions (NDCs) by 2030, an estimated $2.5 trillion is needed.
The full transition to a low-carbon economy would require an even more staggering $10 trillion. Given this immense funding requirement, India’s climate finance strategy must be clear and well-defined to avoid regulatory ambiguity.
But developing a climate finance taxonomy requires creating a standardised system that accommodates India’s unique economic, social, and environmental contexts. The process is complex and time-consuming, involving cross-sector collaboration, data gathering, capacity building, and regulatory alignment — all while mitigating the risks of greenwashing and ensuring an inclusive transition.
Global Trends, Local Gaps
The Network for Greening the Financial System (NGFS), which includes 89 central banks worldwide, is driving efforts to integrate climate risks into financial stability policies.
Since joining in 2021, the Reserve Bank of India has taken commendable steps, including launching green deposits, expanding priority sector lending for renewable energy, and issuing sovereign green bonds worth $2.2 billion.
The RBI’s 2022-23 Report on Currency and Finance emphasised that the absence of standardisation introduces financial risk and complicates the identification of green assets.
Without a clear taxonomy, Indian banks struggle to design products to support climate goals.
Bridging the Gaps
Fast-track the climate taxonomy: The government needs to expedite the climate taxonomy to provide much-needed clarity to investors and institutions.
Strengthen policy coordination: The Finance Ministry, RBI, and other regulators should work in tandem to ensure seamless implementation.
Prevent greenwashing: Strict monitoring and verification mechanisms must be established to ensure that only genuinely sustainable projects receive green finance.
Leverage global climate funds: India could tap into international green finance mechanisms to accelerate its transition while aligning with global best practices.
Enhance transparency: Mandatory climate risk disclosures for financial institutions, akin to the Task Force on Climate-related Financial Disclosures (TCFD) framework to build investor confidence.
The Way Forward
Scaling climate finance in India requires a collaborative approach, and government has made significant strides in fostering partnerships between regulators, financial institutions, and private sector. By developing and refining tailored climate finance frameworks and policies, India is proactively addressing its unique challenges while remaining open to global best practices. This balanced approach ensures that India’s climate finance ecosystem remains both locally relevant and globally competitive.
The government’s initiative to develop a clear climate finance taxonomy is a promising step forward, but timely execution is crucial to maintain momentum. With a well-defined framework in place, financial institutions, regulators, and policymakers will be empowered to translate political commitment into tangible, impactful results.
By prioritising the creation of a robust and credible taxonomy, India can build a thriving climate finance ecosystem that accelerates its transition to a low-carbon future.
Sandhu, is Professor of Finance, IMT Ghaziabad; Jindal holds a PhD in Economics and is a Senior Faculty & Energy economics researcher