Draft climate finance taxonomy framework aims to enhance green funding

Draft framework suggests hybrid approach to attract investors

To support investors in aligning with India’s climate action goals and facilitate greater resource flow for sustainable technologies and activities, the finance ministry on Wednesday released a much-awaited draft climate finance taxonomy framework.

 

The framework aims to enhance funding for climate-friendly technologies and develop research frameworks across sectors like power, mobility, agriculture, and water management, as well as for hard-to-abate sectors such as steel, cement, and iron. It also seeks to prevent greenwashing and improve tracking of financing.

 

The draft framework focuses on three objectives: mitigation, adaptation, and the transition of hard-to-abate sectors. It suggests a hybrid approach that includes both qualitative and quantitative elements, with implementation occurring in phases.

 

Initially, qualitative criteria will establish a comprehensive taxonomy that aligns with national priorities, such as inclusive growth, achieving net-zero emissions by 2070, and ensuring reliable energy access.

 

A climate finance taxonomy is designed to assist domestic and international policymakers and investors in identifying projects or sectors that require funding and align with a country’s overall climate goals.

 

Defining what constitutes climate-consistent—or truly green—investments is an essential step forward for climate finance in developing countries, according to climate finance experts.

 

Currently, due to the absence of clear definitions in India, investors are hesitant to engage as it involves risks and uncertainties about the sustainability of potential projects. 

 

"This is particularly important because greenwashing-- misleading and false claims about the sustainability of a project, service, or business operation -- has emerged as a major challenge in climate finance. A robust, science-based taxonomy can serve as a safeguard against these misleading claims," said Kritima Bhapta, a research associate in the macroeconomics segment of the Growth, Finance, and Development vertical at the Centre for Social and Economic Progress (CSEP).

 

“Once the framework is finalised, investors will have more clarity,” she added. 

A noteworthy aspect of this taxonomy is its focus on Micro, Small, and Medium Enterprises and recognition of agriculture’s critical role in climate change mitigation and adaptation. This emphasis distinguishes it from many international taxonomies, including those from the EU.

 

“For hard-to-abate sectors, the framework will support low-carbon pathways for companies. A well-defined green taxonomy will provide financial institutions with the clarity they need to confidently scale investments in climate adaptation and mitigation. It’s about building trust and transparency in where capital flows. India’s move towards a low-carbon economic ecosystem will give us a unique competitive advantage,” said Namrata Rana, National Head of ESG, KPMG in India.

 

Heena Khushalani, a partner in Climate Change and Sustainability Services at EY India, expressed optimism that the climate finance taxonomy would create momentum for investment in the coming years and lead influential institutions to develop their net-zero pathways.

 

“While many prominent international banks have their net zero transition plans in place, Indian banks are expected to announce their net-zero targets in the next two years. While the financial services sector in India has had a slow start in embedding sustainability, with strong support from regulators, and initiatives like this taxonomy will certainly accelerate their efforts. They recognise climate finance as a significant opportunity to contribute to the country’s Viksit Bharat agenda” Khushalani stated.

 

India’s climate action is guided by commitments outlined in the Nationally Determined Contributions (NDCs) submitted to the United Nations Framework Convention on Climate Change (UNFCCC) in 2016, with updates made in 2022. The NDC focuses on reducing the emission intensity of GDP, enhancing non-fossil energy capacity in electric power generation, and establishing additional carbon sinks.

 

To meet its climate targets as detailed in the NDCs, India requires an estimated $2.5 trillion by 2030. According to NITI Aayog’s India Energy Security Scenarios, India will need $250 billion annually until 2047, which excludes costs for electric vehicle infrastructure, new iron and steel plant demands, and more.

 

Amid ongoing discussions surrounding new climate finance goals and the persistent gaps in actual disbursements, there has been a strong push from Global North actors for emerging economies to create more enabling environments. “While the morality of this demand is questionable in the context of their failure to meet financing obligations, a climate finance taxonomy could be seen as a step in that direction,” said Sehr Raheja, program officer of the Climate Change Programme at the Centre for Science and Environment (CSE).

 

She added, “As countries grapple with the Baku to Belem Roadmap and the pressing question of how $1.3 trillion in climate finance will be mobilised for the Global South, the timely release of India’s taxonomy signals that it is undertaking the necessary domestic work to potentially attract more funding.”

 

Funding for adaptation actions is equally crucial for addressing climate change impacts, building resilience, and achieving India’s development goals. Preliminary estimates indicate that about $206 billion at 2014-15 prices will be required between 2015 and 2030 to implement adaptation actions in agriculture, forestry, fisheries, infrastructure, water resources, and ecosystems.

 

CSE’s Raheja highlighted “the need for greater clarity regarding scrutiny and safeguards. Details on how accountability will be ensured will be crucial moving forward.”

 

Similarly, one of the main tasks, according to CSEP’s Bhapta, would be to ensure that India’s taxonomy is interoperable and aligns well with global taxonomies, so that it remains compatible with international finance flows. At the same time, coherence with existing domestic regulatory frameworks such as those of the RBI, SEBI, and NABARD will also be important.

 

Another challenge would be to set science-based thresholds and technical criteria for each sector, which will require time and expert input. This transition may be particularly difficult for small businesses that may lack the resources to meet new requirements. 

OBJECTIVES IN A NUTSHELL 

- Facilitating greater resource flow to climate friendly tech and building resilience

  - Will entail mitigation, adaptation and transition support in hard-to-abate sectors

  - Prevent greenwashing

  - Consistency with Viksit Bharat at 2047