Will Climate Finance Taxonomy Help India Unlock $2.5 Trillion in Green Investment?

India has set for itself ambitious targets: achieve net zero emissions by 2070 and meet 50% of its electricity requirements through non-fossil fuel sources by 2030 in line with its Nationally Determined Contributions (NDCs) commitment. The latter would need an estimated $2.5trn in investments.

The Finance Ministry's draft climate finance taxonomy, released on May 7, is the country’s latest move to create a clear, credible framework to channel green finance towards these goals.

The draft taxonomy reveals the government’s approach to classifying environmentally friendly activities and its intent to increase the flow of finances to specific sectors in need of urgent funds.

The taxonomy draft is expected to spur India’s efforts to tap funds for climate action by ensuring that they are used exclusively for the purpose for which they are raised. This is because, though many banks discuss sustainable finance initiatives, there is considerable confusion among them in the absence of a comprehensive list of sustainable portfolios.

The draft attempts to address this by clearly distinguishing activities that support climate action from those aiding transition. The former relate to emission reduction or climate adaptation, including renewable energy, ecosystem restoration and sustainable water management. Transition activities, on the other hand, address hard-to-abate sectors by supporting emission reduction and energy efficiency.

Grounded in eight guiding principles, the draft stresses the alignment with national goals, proportionality for MSMEs, promotion of indigenous technology and a flexible approach inspired by but not bound to global models. It, additionally, identifies the priority sectors such as power, mobility and building.

Clarity and Flexibility

Apart from unlocking domestic and foreign capital by boosting investor confidence, experts believe that a well-defined taxonomy can reduce greenwashing. “The draft aims to prevent greenwashing by ensuring that investments labelled as green are genuinely aligned with India’s climate transition goals. It provides government-backed clarity and confirmation that these activities are truly sustainable, addressing concerns that many so-called green investments prioritise profit over real environmental impact,” said Manpreet Singh, partner, ESG strategy and transformation, PwC India.

The draft also mentioned that the final document will be kept flexible to accommodate evolving technologies. “It is kept dynamic to allow for the inclusion of new solutions as they emerge and become commercially viable,” said Singh.

Targeting Specific Sectors

While renewable energy space is somewhat established in terms of investor interest, there are other important areas like battery storage where sufficient money is not flowing yet due to the lack of a proven track record, high upfront capital investments and the associated risks.

Taxonomy could steer more capital towards decentralised renewable energy as well. Similarly, in mobility, it can bolster EV infrastructure and modal shift. In the industry, it can help transition steel, cement, and chemicals.

Agriculture, which contributes around 15% of India's total emissions, will benefit from investments in sustainable practices, as will MSMEs, which are significant energy consumers and contributors to the country’s carbon footprint. Singh said, “The draft has taken into account that the MSMEs and agriculture would need separate treatment.”

To be implemented in a phased manner, starting with placing a broad framework aligned with inclusive growth, net-zero target and sector-specific low-carbon pathways, the draft proposals will eventually embrace quantitative thresholds and benchmarks. The phased rollout will allow the flexibility needed to address technological challenges and data constraints in sectors like MSMES and agriculture.

“While the first phase lays a strong foundation helping many financial institutions align their net zero transition plans, the final taxonomy will help us build a strong climate finance proposition and create significant opportunities for international and domestic investors to contribute to India’s green transformation,” said Heena Khushalani, partner, climate change and sustainability services, EY India.

Global Inspiration

The draft sets out to develop a taxonomy that amalgamates many global taxonomies, but with an India focus. The ‘do no significant harm’ principle, which means implementing climate-friendly projects while also ensuring that efforts to address one issue do not disproportionately harm others, is taken from the EU taxonomy. Further, it incorporates the promotion of indigenous technologies, taking inspiration from the taxonomies of China, Brazil and Malaysia.

“The taxonomy document outlines the international standards reviewed during its development, highlighting alignment with EU and UK taxonomies, and compatibility with global platforms like the International Platform on Sustainable Finance. The goal is to ensure global alignment, recognising that many investors financing India’s green transition will come from abroad and must comply with their own jurisdictions’ requirements,” said Singh.

Globally, China was among the first countries to develop a green finance taxonomy, followed by the EU, Singapore, Indonesia, Malaysia, the Philippines, Mexico, South Africa, Colombia, South Korea, Thailand and others. Pakistan introduced its green taxonomy draft in February 2025. A World Bank report states that globally, 47 sustainable finance taxonomies have been issued till last year.

India’s draft climate finance taxonomy is a step in the right direction with an ambitious approach. Coming next is the final draft with strong definitions and even more vigorous enforcement in a country where ambiguity has often undermined implementation.

The actual value of the draft proposals will depend on whether it can direct real capital flows to the sectors that are most in need, bridge trust gaps, and lead to an implementable classification system.