Lost In Transition: India's Climate Finance Taxonomy

The Budget is underwhelming, international commitments are flimsy, and the taxonomy delayed for 6 months — again. 

This doesn’t spell that our environment is in crisis. While India has set ambitious targets for reaching Net Zero and expanding its clean energy capacity, a crucial piece of the puzzle, which is a comprehensive climate finance taxonomy, is missing.

 A Climate What?

A climate finance taxonomy is a guidebook that defines which investments count as “green” or climate-friendly. It sets clear standards and criteria to make sure that funds earmarked for climate action are used effectively.

This framework helps prevent misallocation of resources, reduces the risk of “greenwashing” (where investments are falsely labeled as eco-friendly), and builds trust among private investors.

Last year’s Budget announcement to develop the country's own taxonomy was welcomed by the markets, environmentalists and financial regulators alike. This year’s Economic Survey also recognised India's responsibility. "While the country has low per capita carbon emissions, it is committed to pursuing low-carbon growth," it said.

Yet, among all the anticipation, the current Budget missed out on defining a clear guideline.

The Need For A Roadmap

Without the long-awaited climate finance taxonomy, India risks misdirected investments, or green capital that could end up funding projects that don't actually contribute to climate goals.

It could also erode investor confidence since investors need clear guidelines to make sure their funds are making a real impact. A lack of taxonomy may discourage international and domestic investment in sustainable projects. 

As countries worldwide develop and refine their green finance frameworks, India must catch up to remain competitive in the global push for sustainable finance.

A Reserve Bank of India (RBI) report from 2023 estimated that funding for climate change adaptation could cost up to Rs 85.6 lakh crore in total, requiring the allocation of about 2.5 per cent of GDP annually till 2030. Without a taxonomy, it could be difficult to encourage and guide investments to the right activities. 

Missing Deadlines

It's not that no work is being done on this front. It's that progress gets delayed and then delayed again. Economic Affairs Secretary Ajay Seth has said that work on India’s climate finance taxonomy is in progress and should be finalised within the next six months. The catch: He also said this 6 months ago in September 2024. 

This development is critical and cannot be delayed indefinitely. It has the power to direct investments to sectors that can deliver maximum climate benefits. It can help India integrate its financial framework with international climate finance systems, bolstering investor confidence and cooperation. 

The taxonomy will guide investments across a variety of critical areas — from clean manufacturing and nuclear innovation to climate-resilient agriculture and urban transformation.

Globally, many countries are also refining their climate finance strategies. While India remains committed, this isn't the only deadline it has missed on the climate front, recently. It also missed the UN deadline of February 10 to set new climate targets. To the world's discredit, many countries including top polluters like China also fell in this defaulting category. 

UN climate chief Simon Stiell has urged nations to finalise and submit their plans by September 2025 at the latest. This comes at a time when there is worldwide concern about global climate action failing in the wake of Trump's return as US President. 

India’s timely completion of its taxonomy will be key to maintaining its momentum in the global green race.

The Road Ahead

India’s pursuit of a Net Zero future is underpinned by major investments and transformative initiatives in clean technology, renewable energy and sustainable manufacturing.

However, the absence of a clearly defined climate finance taxonomy leaves a critical gap in ensuring that green investments are both effective and transparent. 

The coming months will be decisive in shaping the country’s sustainable finance landscape and ensuring that every rupee invested contributes meaningfully to a greener, more resilient future.