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Updated on: July 11, 2025

India’s 2025 Climate Finance Taxonomy: What Investors and Policymakers Need to Know

Why a Climate Finance Taxonomy Matters ?

As India races towards its net-zero goal by 2070 and the broader Viksit Bharat 2047 vision, sustainable finance is no longer a fringe topic, it's the next growth frontier. But what counts as green ? Until now, this question has been hard to answer with consistency or credibility.

That’s about to change.

In May 2025, India released its Draft Framework for a Climate Finance Taxonomy, a science-based, principle-driven classification system to guide where climate-aligned capital should flow, and what should qualify as such. Once finalized, it will become a cornerstone for investment screening, policy incentives, green bonds, sustainability-linked loans, and corporate disclosures.

Think of it as a common language for climate-aligned investing. A taxonomy defines which technologies, projects, and economic activities truly support:

Mitigation (emissions reduction),

Adaptation (climate resilience), and

Transition (especially for hard-to-abate sectors).

Without it, one fund’s “green project” could be another’s greenwashing risk.

Globally, countries like the EU, China, Malaysia, Indonesia, and Singapore have already adopted climate taxonomies. India’s framework builds on these, but adapts them to our national development goals, indigenous technologies, and local climate vulnerabilities.

Why Now ?

India’s taxonomy is more than a disclosure tool, it’s an investment accelerator.

With SEBI’s ESG fund rules tightening, RBI's climate stress-testing gaining momentum, and global investors prioritizing green portfolios, there’s rising demand for credible, science-backed screening.

The taxonomy aims to:

Prevent greenwashing

Guide public and private capital toward credible green and transition pathways

Enable India-specific ESG product design

Support MSMEs and ensure proportionality

Make Indian climate projects more investable in global markets

What Does the Draft Framework Include?

Three Core Objectives

Redirect capital toward mitigation, adaptation, and transition-aligned activities

Prevent greenwashing and reputational risk

Align with Viksit Bharat @2047, India’s long-term developmental vision

Eight Foundational Principles

Consistency with India’s NDCs and Net Zero by 2070

Do no significant harm to other climate objectives

Support for MSMEs through simplified requirements

Indigenous tech promotion, not just imported solutions

Science-based, transparent inclusion criteria

Contextual pathways — not one-size-fits-all emissions targets

How India’s Taxonomy Is Structured

The draft framework is designed as a living document, flexible enough to evolve with India’s development priorities. It categorises economic activities based on how strongly they support mitigation, adaptation, or the transition of hard-to-abate sectors.

There are three broad buckets:

Climate Supportive – Tier 1 : These include zero-emission and strong adaptation measures with clearly defined success indicators (e.g., full shift to renewables).

Climate Supportive – Tier 2 : Activities that reduce emission intensity or enhance resilience but may still involve some emissions.

Transition Supportive : Actions that improve performance in sectors where full decarbonisation isn’t yet viable, like cement or steel, but that still move the needle.

Key Sectors Identified

The taxonomy will gradually expand, but for now, it focuses on these priority sectors:

Power : A balanced energy mix is promoted, including renewables, thermal, hybrid, and nuclear. Clean electrification is central to the transition.

Mobility : With transport emissions rising fast, the taxonomy supports EVs, clean fuels, and sustainable public transport.

Buildings : Green building codes and energy-efficient infrastructure are key. Standards like GRIHA are gaining prominence.

Agriculture, Food, Water : Adaptation is the focus here, especially in the face of climate stress on food systems and water access.

Hard-to-Abate Sectors: Cement, steel, and other heavy industries are recognised for transition support, with an emphasis on R&D, fuel-switching, and technology pilots.

What Sets India’s Taxonomy Apart?

Adaptation gets equal weight unlike EU or ASEAN taxonomies

Tiered approach for transition enabling incremental improvements

MSME-friendly design avoiding exclusion of smaller businesses

Promotion of local tech aligning green finance with Make in India

How will it be used ?

Investors : To screen and prioritize green/transition assets

Banks & NBFCs: To design green loan portfolios, issue green bonds

Corporates: To align sustainability disclosures and strategy

Government: To set eligibility for climate subsidies and schemes

Auditors & ESG raters: To verify the credibility of climate-related claims

What Should Companies and Investors Do Now?

Start mapping your current projects and portfolios to the taxonomy tiers

Prepare for disclosures that align with these classifications

Build internal taxonomies for investment or procurement aligned with the framework

Engage with sector annexures as they roll out, especially if you’re in energy, infrastructure, agriculture, or manufacturing

This is more than just a classification exercise. India’s Climate Finance Taxonomy is a foundational move toward aligning the country’s capital flows with climate priorities, without compromising on development goals. While the framework continues to evolve and sectoral annexures are still being finalized, businesses and financial institutions can begin by improving the visibility of their climate-aligned activities, creating strong documentation trails, and understanding the principles behind classification.

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