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As sustainable finance matures from a buzzword into a foundational pillar of global investment strategy, governments are realizing the urgent need to define what truly qualifies as “green.” While the European Union has led this charge with its pioneering EU Taxonomy, India is now tabling its own version, designed to suit its unique developmental and environmental context.
In 2024, the Ministry of Finance released India’s draft Climate Finance Taxonomy a framework that could reshape how capital flows into climate-aligned sectors. But why is a taxonomy important in the first place, and how will India’s approach differ from the EU’s?
At its core, a sustainable finance taxonomy is a classification system that determines whether an economic activity is environmentally sustainable. It serves as a financial language guide for governments, investors, companies, and regulators. A well-designed taxonomy reduces ambiguity, combats greenwashing, and ensures capital flows to sectors that genuinely support environmental goals.
With trillions of dollars now earmarked for ESG and green investments globally, the absence of a clear, credible, and science-based definition of "green" creates confusion and misallocation. That’s why countries are building taxonomies, to create a common rulebook. The EU Taxonomy, launched in 2020, is the most developed framework so far, and it has already influenced capital decisions across Europe and beyond.
The EU Taxonomy is structured around six environmental objectives, with an initial focus on climate mitigation and adaptation. For an activity to be classified as sustainable under this system, it must make a substantial contribution to at least one environmental objective, do no significant harm to the others, and comply with minimum social safeguards.
This ambitious framework has led to the mobilization of over €300 billion in green investment between 2023 and 2024. However, it hasn’t been without criticism. Many industry stakeholders have pointed to the taxonomy’s complexity, the exclusion of high-emission sectors that are essential for transition (often referred to as the “brown” economy), and the compliance burden it places on smaller firms. Nevertheless, the EU’s efforts have created a global reference point for sustainable classification systems.
India’s draft climate finance taxonomy unveiled by the Ministry of Finance in 2024 draws from global best practices, particularly the Common Ground Taxonomy (CGT) developed by the International Platform on Sustainable Finance (IPSF), while tailoring it to India’s developmental priorities.
Key sectors prioritized in the draft include renewable energy, e-mobility, water management, energy efficiency, and circular economy initiatives. The draft also reflects a strong focus on development-linked finance, aiming to channel funds toward projects that not only mitigate climate risks but also generate employment and improve livelihoods.
In addition, the taxonomy is being closely aligned with India’s emerging regulatory frameworks such as the SEBI-mandated BRSR Core, the RBI’s climate risk disclosure roadmap, and emerging voluntary carbon markets. This alignment ensures coherence and avoids duplication of effort across reporting and compliance mandates.
Unlike many Western frameworks that adopt a carbon-centric lens, India’s taxonomy introduces the concept of climate justice and inclusive growth. It acknowledges that the path to sustainability must also be equitable, especially in a country where large portions of the population depend on agriculture, informal employment, and fossil-fuel-linked livelihoods.
One of the standout features of India’s approach is its emphasis on blended finance a financing model where public or philanthropic capital is used to de-risk and attract private investments into high-impact green sectors. The taxonomy also guides priority-sector lending, ensuring that banks can incorporate green goals without ignoring credit access in underbanked regions.
By building in considerations for livelihood resilience, rural development, and social equity, India is crafting a taxonomy not just for decarbonization, but for sustainable development in the truest sense.
For corporates and financial institutions, this means a clear, credible framework to classify green projects, improve ESG reporting, and unlock financing opportunities, from green bonds to sustainability-linked loans. Investors, both domestic and foreign, gain the confidence that their capital is aligned with measurable sustainability outcomes.
But here’s the catch, a taxonomy is only as effective as the people implementing it. From compliance teams to sustainability officers, India needs leaders who understand both the financial and technical sides of the green economy.
This is where capacity building becomes critical, and where institutions like IIM Kashipur, in collaboration with evACAD, are stepping in. The PG Executive Program in Net Zero Strategy & Sustainability Leadership is designed for mid- to senior-level professionals who want to navigate exactly these transitions. The program covers climate finance, ESG frameworks, carbon markets, clean technology strategies, and policy alignment, giving leaders the toolkit to not only comply with India’s taxonomy, but to turn it into a competitive advantage.
India’s climate taxonomy is expected to roll out in phases from 2025 to 2027, with gradual integration into banking guidelines, ESG ratings, investor mandates, and public disclosure systems. However, for this transition to be effective, several elements must fall into place: institutional capacity, taxonomy literacy, and sector-specific guidance.
There is also a growing need to build technical expertise across lenders, auditors, ESG consultants, and sustainability officers especially in mid-sized companies and financial institutions.
“With the right guardrails, India’s green taxonomy can move us from intention to integrity ensuring every rupee flows where sustainability is not just a label, but a measurable outcome.”
India’s taxonomy is more than a document; it's a strategic tool that can shape how the world’s most populous democracy transitions toward a low-carbon economy. By fusing environmental ambition with social equity, it has the potential to not only attract green capital, but also inspire other emerging economies to chart similar paths
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