India’s Climate Finance Taxonomy

India’s draft Climate Finance Taxonomy framework fails to address the country’s unique climate challenges.

What is Climate Finance Taxonomy?

A climate finance taxonomy is a system that classifies which parts of the economy may be marketed as sustainable investments.
It refers to a set of standardised regulations and guidelines to inform companies and investors on making impactful investments towards environmental conservation and combating the climate crisis.
Countries that have developed taxonomies include South Africa, Colombia, South Korea, Thailand, Singapore, Canada, Mexico, and the European Union.

Released by : The Department of Economic Affairs, Ministry of Finance
It aims to define and streamline what qualifies as ‘green’ or climate-aligned economic activity, to mobilise climate finance and prevent greenwashing.
Objective: To guide policymakers, investors, and financial institutions on identifying and financing climate-relevant sectors and technologies.
Applies to: Technologies, measures, projects, and activities aligned with India’s Net Zero and climate resilience goals.
Built as a “living document”, subject to periodic updates to remain aligned with evolving national priorities.

Divides climate action into three pillars:
- Mitigation
- Adaptation
- Transition (focused on hard-to-abate sectors)
Sectors identified:
- Power, mobility, buildings
- Agriculture, food, and water security
- Hard-to-abate industries (e.g., cement, iron, steel)

Climate Supportive Activities:
- Tier 1: Activities that avoid emissions absolutely or reduce emissions beyond a threshold.
- Tier 2: Activities that lower emission intensity or support efficiency in cases where full avoidance isn’t feasible. May still have some emissions but show clear improvement pathways.
Transition Supportive Activities: Focus on sectors where absolute emission cuts are not yet viable.

Lack of Indigenous Perspective: The draft appears borrowed from international models like the EU taxonomy, without adequate adaptation to India’s context.
Misplaced Sectoral Focus:
- Inclusion of Low-Emission Sectors: Sectors like agriculture, food, and water security are prioritised without justification.
- Neglect of High-Emission Sectors: High-emission sectors like energy generation, transport, chemicals, cement, plastics, manufacturing, and real estate are not adequately prioritised.
Absence of Clear Criteria and Metrics: No scientific or data-backed rationale for choosing focus sectors.
Vague Concepts: Undefined terms like “climate-friendly technologies” and “public consultation.”
Weak Governance and Institutional Design: No governance mechanism defined despite India’s federal structure.
No Cross-Sectoral Integration: Omits links between sectors and impact of consumer behavior.
Inappropriate Hybrid Approach: Misuse of qualitative and quantitative methods without metrics.
Ignoring Equity and Justice Principles: No integration of social aspects like labour rights, human rights, or impact on vulnerable communities.
Lack of Measurable Metrics: No system for impact assessment or third-party verification.
Overemphasis on Modernisation: Promotes climate resilience in agriculture using high-tech solutions while ignoring native knowledge, varieties, and traditional practices.

Re-centre on high-emission sectors for climate finance.
Exclude low-emission and vulnerable sectors like agriculture from transition burdens.
Define metrics and principles rooted in science, indigenous systems and third-party verifiability.
Establish a governance structure that includes state governments and local stakeholders.
Incorporate ESG and social equity considerations to protect vulnerable populations.
Recognise behavioural change and cross-sectoral linkages as strategic levers for emission reduction.

A classification system to define which economic activities can be labeled as environmentally sustainable.
Aims to guide investments toward activities that help achieve the EU’s climate goals, especially net-zero emissions by 2050.
Seeks to combat greenwashing by setting clear standards for what counts as “green”.
The taxonomy defines three types of green investments:
- Substantial Contribution: Activities that directly help achieve climate goals (e.g., wind farms).
- Enabling Activities: Support other green efforts (e.g., renewable energy storage).
- Transitional Activities: Not fully sustainable but cleaner than the industry average (e.g., gas and nuclear energy under strict criteria).

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