India has taken a major step towards aligning its financial system with climate goals by unveiling a draft Climate Finance Taxonomy on May 7, 2025. This move aims to direct both domestic and foreign investments into truly sustainable activities, improve investor confidence, and reduce the risk of greenwashing.
With ambitious climate targets set—achieving net-zero emissions by 2070 and ensuring that 50% of electricity comes from non-fossil sources by 2030 India needs to unlock $2.5 trillion in green investment by the end of this decade. The taxonomy is designed to facilitate this capital flow while providing clarity on what constitutes a climate-aligned economic activity.
Why a Climate Finance Taxonomy?
Despite an increasing number of financial institutions adopting green finance terminology, the lack of a standardized definition has resulted in confusion. There has also been a growing concern that many investments marketed as “green” are not delivering genuine climate benefits a practice known as greenwashing.
To counter this, the Indian government’s taxonomy provides:
- Clear definitions of climate-positive activities.
- Sector-specific guidance to ensure funds reach areas in genuine need.
- A phased implementation plan to allow time for industries to adapt.
Key Features of the Draft Taxonomy
The taxonomy is guided by eight core principles, including:
- Alignment with India’s Nationally Determined Contributions (NDCs).
- Special considerations for MSMEs and agriculture.
- Promotion of indigenous technologies.
- Flexibility for future inclusion of new climate solutions.
It divides green activities into two broad categories:
- Climate Action Activities
These include direct emission reduction and climate adaptation efforts—like renewable energy projects, reforestation, sustainable water management, and climate-resilient infrastructure. - Transition Activities
These focus on hard-to-abate sectors like steel, cement, and chemicals, which cannot switch to clean energy immediately. The taxonomy promotes energy efficiency and technological upgrades in these areas.
Target Sectors Identified
The taxonomy lays out priority areas that need immediate attention and capital:
- Energy (Power) – Including solar, wind, hydro, and emerging areas like battery storage.
- Mobility – Electric vehicle (EV) infrastructure, modal shifts to public transport.
- Buildings – Energy-efficient design and retrofitting.
- Industry – Decarbonising sectors such as steel, cement, chemicals.
- Agriculture – Low-emission practices, sustainable irrigation, climate-resilient crops.
- MSMEs – Clean tech adoption, energy audits, and green certification.
Agriculture and MSMEs: Special Focus
Agriculture contributes approximately 15% of India’s total GHG emissions, and MSMEs despite being small are collectively large energy consumers. Recognizing their unique constraints, the draft proposes separate treatment for both sectors, with lighter reporting requirements and tailored financial instruments.
Renewable Energy: Progress and Potential
India has already made significant progress in the renewable sector:
- As of February 2025, non-fossil fuel sources account for 47.4% of India’s total installed power capacity.
- Solar: 21.8%
- Wind: 10.3%
- Hydro: 10.0%
- Nuclear: 1.7%
India aims to reach 500 GW of non-fossil fuel capacity by 2030. The taxonomy will help steer investments into battery storage, smart grids, and decentralised renewable systems that still struggle to attract sufficient capital.
Supporting Government Initiatives
Several ongoing government schemes will align with the taxonomy:
- PM KUSUM: Aims to install 10,000 MW of decentralised solar systems, targeting 34.8 GW of capacity addition by March 2026.
- PM Surya Ghar Muft Bijli Yojana: Plans to solarise 1 crore households by March 2027.
- Nuclear Energy Mission: Backed by a ₹20,000 crore outlay, aims to develop Small Modular Reactors (SMRs) and expand nuclear capacity to 100 GW by 2047.
These initiatives will benefit from the taxonomy, which gives financial institutions a framework for aligning their lending and investment portfolios with national targets.
A Global Perspective
India’s taxonomy is inspired by international frameworks but tailored to Indian realities. It reflects lessons from:
- EU and UK Taxonomies: Borrowing the “Do No Significant Harm” principle.
- Asian Peers: Like China, Malaysia, and Brazil, which promote indigenous innovation and adopt flexible, inclusive models.
Globally, 47 sustainable finance taxonomies have been published, as per a World Bank report. Countries like Pakistan, Singapore, South Korea, and Mexico are also developing their own versions. India’s approach stands out for blending global alignment with national priorities.
India’s Climate Metrics in Global Context
- India’s per capita emissions in 2023 stood at 2.9 tCO₂e, far below the:
- World average: 6.7 tCO₂e
- EU: 6.9 tCO₂e
- Japan: 8.3 tCO₂e
- USA: 17.2 tCO₂e
- Canada: 20.4 tCO₂e
This underscores that while India is a low per capita emitter, its large population and growing economy mean its total emissions and energy demands are rising rapidly. Hence, mobilizing green finance is essential to maintain sustainable growth without compromising developmental needs.
Challenges Ahead
While the taxonomy draft is a promising framework, its effectiveness will depend on several factors:
- Adoption by financial institutions and regulators.
- Development of sector-specific benchmarks.
- Integration with reporting and auditing systems.
- Avoidance of regulatory overload, especially for MSMEs.
- Robust enforcement mechanisms to ensure compliance and deter greenwashing.
The final version of the taxonomy is expected to include quantitative thresholds, transition timelines, and measurement tools for investors and project developers.
Conclusion: Building a Green Investment Ecosystem
India’s draft Climate Finance Taxonomy is a foundational tool that has the potential to reshape the country’s investment landscape. By clearly defining what counts as green or transitional, it aims to channel massive amounts of capital—$2.5 trillion by 2030—into sectors that will help India meet its net-zero commitment by 2070.
It offers clarity to investors, confidence to markets, and structure to government schemes. Most importantly, it sets India on a path where growth and sustainability move hand in hand.
If implemented effectively, it will not only accelerate India’s green transition but also position the country as a leader in climate finance innovation in the Global South.
Written by Vaishali Verma
Sub-editor, DisastersNews