As Green Taxonomy Fades, Climate Finance Rises

Climate finance taxonomy, an enabler to channel capital for climate action, has finally taken shape in India, albeit in a draft form open for stakeholder input. The long-awaited draft aims to accelerate climate finance flows and prevent ‘greenwashing’ while supporting India’s development goals. In another context and halfway around the world, the UK government's recent decision to abandon its green taxonomy project after extensive consultations could offer some insight into India’s endeavours to finalise its own.

In July 2025, HM Treasury concluded that a UK taxonomy "would not be the most effective tool to deliver the green transition" after receiving 150 consultation responses from stakeholders in the financial and real economy sectors. The decision was particularly striking given the UK's position as a global sustainable finance leader. The most significant finding from the UK consultation was the disconnect between real economy expectations and financial sector realities regarding the taxonomies' influence on capital allocation. While firms in sectors like energy and nuclear expected taxonomy classifications to impact their ability to raise capital, financial-services respondents who make investment decisions viewed taxonomies merely as classification tools serving as additional data points rather than material drivers of investment decisions.

The Indian draft taxonomy could consider whether a similar implication is applicable in its context. It currently adopts a hybrid approach; qualitative principles in the initial phase, followed by quantitative metrics. This is prudent, as Technical Screening Criteria (TSC), or quantitative metrics, typically take years to develop and raise ongoing concerns over their effectiveness and efficiency in many jurisdictions.

Two-thirds of the UK respondents demanded alignment with EU taxonomy, yet simultaneously criticised its complexity and practical implementation challenges. This created an interoperability concern. The Indian taxonomy has tried to get ahead of the desire for global alignment and local relevance and embraces globally accepted principles, such as alignment with national climate goals, interoperability and avoiding harm to other climate finance objectives. Aligning with domestic priorities strengthens local buy-in, while interoperability could attract foreign investment.

The Indian draft acknowledges the critical role of MSMEs, calling for capacity building and simplified reporting. This dual focus can help MSMEs understand taxonomy requirements and ease compliance burdens stemming from resource constraints, addressing unique Indian circumstances.

Clarity in Classification

A notable—and bold—feature of the draft is its decision to distinguish transition activities in hard-to-abate sectors from broader mitigation efforts. Given India's growth trajectory and its infrastructure needs, this separation is justified. However, the line between mitigation and transition could blur in practice. For instance, energy efficiency and R&D, listed under mitigation, apply across sectors, including those deemed hard-to-abate. This ambiguity may confuse financiers trying to classify projects.

The UK consultation revealed strong support for transition activities but highlighted the inherent limitations of binary green/not-green classifications. Respondents favoured approaches like Singapore's traffic light system, though this would create significant divergence from existing frameworks.

India's decision to distinguish transition activities in hard-to-abate sectors from broader mitigation efforts is commendable, but the draft needs clearer guidance on this distinction. The UK experience suggests that relative performance targets which India currently employs may "dampen incentives for companies that already invest in low-carbon technologies." India should accelerate the integration of absolute benchmarks alongside relative measures to address this concern.

While the taxonomy aims for interoperability, its India-specific pathway to net-zero—targeting 2070 rather than mid-century could deter global investors accustomed to EU-style benchmarks. This divergence may limit its international acceptance. The taxonomy also lacks clarity on how it will interface with existing financial instruments. SEBI’s green and transition bond frameworks and RBI’s green deposit guidelines already define climate-aligned finance. The draft taxonomy should more clearly explain how its classifications will align with these regulatory frameworks, ensuring coherence and clarity for market participants.

The Way Forward

Currently, the taxonomy uses relative performance targets—such as year-over-year improvements—rather than absolute benchmarks. This could dampen incentives for companies that already invest in low-carbon technologies or plan to do so. Integrating absolute benchmarks would sharpen the taxonomy’s effectiveness and bolster India’s ambitions to develop a carbon market based on relative emissions performance. The sooner the benchmark is integrated with the taxonomy, the better the reaction of corporations to using low-carbon technologies.

A crucial factor in the UK's decision was the lack of compelling use cases beyond existing market frameworks and policies. The consultation found limited evidence that a UK-specific taxonomy would achieve outcomes not already addressed by existing taxonomies or other regulatory measures.

Regulatory bodies like RBI and SEBI must embed the taxonomy into their respective rules to avoid duplication. They should mandate taxonomy-aligned disclosures, reporting, and product development, following the lead of the EU and China, which require taxonomy-based reporting.

To ensure interoperability, setting up international compatibility facilitates alignment with global practices that will ease integration into international markets and encourage mutual recognition.

Data availability is another critical gap. Reliable data is essential to evaluate performance improvements in areas like energy efficiency and emissions reduction. Significant investment in data infrastructure is necessary to support taxonomy implementation.

Success hinges on adoption. A clear roadmap and operational guidance will help users integrate the taxonomy into their mandates. Banks must equip relationship managers and underwriters with documentation protocols to classify loans under the taxonomy—promoting consistency and accountability.

Ultimately, the taxonomy’s success will depend on effective coordination, robust data, and clear, harmonised regulations. Policymakers must ensure that financial institutions and MSMEs receive the necessary tools and support to adopt the taxonomy widely and meaningfully.

Jena is a visiting senior fellow at the London School of Economics and Political Science (LSE) and adviser at the Climate and Sustainability Initiative (CSI). Selvaraju is a policy fellow at the LSE