Green taxonomy: More resources will flow to climate-friendly projects

As India faces a mounting climate challenge, access to finance, advanced technologies, and critical mineral resources assumes greater importance. The draft “Climate Finance Taxonomy”, recently released by the Department of Economic Affairs, Ministry of Finance, comes in as a much-needed framework during these critical times. Given the increased climate vulnerability, particularly in sectors like agriculture and water resources, and the need to increase per capita energy consumption from a paltry 16.7 gigajoules (GJ) in 2022-23 to 45.7-75 GJ per year, India needs a cumulative $2.5 trillion to meet its Nationally Determined Contributions (NDC) targets till 2030. But at the same time, rapid energy transition should not be allowed at the expense of the country’s growth and diversion of resources from other developmental priorities. The draft taxonomy, launched with the aim of directing capital flows towards sustainable and climate-aligned activities, is thus a welcome development. At its core, the taxonomy aims to distinguish between what qualifies as “green” or “sustainable”, providing a clear classification system for private-sector investment. This clarity is essential in unlocking private climate finance, which is crucial in supplementing the limited capacity of public funding.

  India has already started feeling the financial strain of climate adaptation, with its cost growing by the day. With a modest $300 billion pledged by the developed countries for the New Collective Quantified Goal set at COP29, developing countries like India are left to bear most of the cost on their own. With the climate crisis accelerating, India cannot afford to rely solely on international aid or public resources to fund its transition. This makes private-sector investment in green initiatives imperative. In fact, green taxonomies to mobilise climate finance have already been adopted by a large number of other countries, including China and the European Union, ensuring that stakeholders adopt environmental, social, and governance (ESG) safeguards. 

The draft taxonomy is based on eight key principles, including alignment with global climate-action goals, support for indigenous technologies, country-specific pathways, support for micro, small, and medium enterprises (MSMEs), and interoperability with international frameworks. Emphasis on the need to support MSMEs in the green economy is crucial because they are vital for local economic resilience. Accordingly all projects will be classified as climate-supportive activities that contribute to reducing the emission intensity or transition activities for which there is no technologically and economically feasible low-emission alternative.  Initially, the taxonomy will cover the following sectors — power, mobility, buildings, agriculture, food, water security, iron and steel, and cement. But as a living document, it ought to evolve over time, incorporating emerging sectors and technologies. Interestingly, the taxonomy also seeks to address energy transition in hard-to-abate sectors. Sectors such as cement, iron and steel, and heavy industries are notoriously difficult to decarbonise and will therefore play a pivotal role in India’s climate strategy. Including these sectors in the taxonomy by the government is a signal that green financing must not be restricted to low-hanging fruits only.

While the taxonomy is a positive first step, one of the major concerns surrounding green-finance frameworks is the risk of greenwashing, where investment is falsely marketed as environment-friendly. To mitigate this risk, there is a need to come up with robust disclosure mechanisms. Claims of sustainability should be backed by evidence, and disclosure frameworks can ensure that companies and projects adhere to transparent reporting standards.