A new rulebook will help India decide which projects truly help the planet.

The Union Ministry of Finance is expected to launch India’s first Climate Finance Taxonomy in August 2025, aimed at clearly defining economic activities that qualify as green or climate-friendly.

This move is part of a wider push to meet the country’s net-zero target by 2070 and strengthen investor trust in environmental financing mechanisms.

Framework Intended to Avoid Greenwashing

Why is it so difficult to decide what really counts as a green investment? The answer lies in how money flows into climate action and who decides what's truly eco-friendly. For years, there’s been confusion and even disagreement about which projects are genuinely helping the planet and which are just pretending to.

Some companies slap a “green” label on activities that barely reduce pollution, this is known as greenwashing. And without clear rules, it’s been hard for banks, investors, and governments to know where to put their money responsibly.

India is now taking a big step to solve this problem.

The draft was released in May 2025 by the Department of Economic Affairs (DEA). The ministry held a public consultation that ended on June 25, 2025. The final version, developed in coordination with financial regulators like RBI, SEBI, IRDAI, and sectoral bodies, is now ready.

What Is the Climate Finance Taxonomy?

The taxonomy is a classification system that sorts investments into three broad categories: climate-supportive, climate-transition, and excluded activities.

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Within this, Tier 1 and Tier 2 levels differentiate between fully green actions like solar power and those that show progress but are not yet green, such as improvements in industrial efficiency.

Key dates and policy timeline:

Policy Step	Date	Description
Budget Announcement	February 2024	Govt announces intent to create taxonomy
Draft Release by DEA	May 7, 2025	Framework released for public consultation
Public Feedback Deadline	June 25, 2025	Stakeholders submit responses to the Ministry
Expected Launch	August 2025	Final taxonomy scheduled for release

Once launched, the taxonomy will help guide trillions of rupees toward truly sustainable projects and discourage misleading climate claims.

Inclusion of Coal Raises Concerns

What is different in India’s taxonomy is the inclusion of coal, particularly Advanced Ultra Super Critical (AUSC) thermal plants, under the transition-friendly category. While the government argues this reflects India’s energy reality, climate experts and investors have flagged this as risky.

A report by Mongabay India (May 2025) raised concerns that such classifications could reduce global investor confidence. International lenders and ESG funds may avoid projects that include fossil fuels, even if they are cleaner than older models.

To maintain balance, the DEA’s framework insists on the “Do No Significant Harm” principle, which means any included activity must not damage environmental or social systems even if it supports decarbonisation.

India Needs $2.5 Trillion for Climate by 2030

The 2025 Climate Finance Framework report by the DEA estimates that India will need USD 2.5 trillion in climate financing by 2030 to meet its commitments under the Paris Agreement. A major part of this is expected to come through private sector investments, which will rely on clarity in regulatory systems like the taxonomy.

This classification system is also expected to support climate-resilient agriculture, clean mobility, decarbonised buildings, and green manufacturing. The first rollout will not define carbon thresholds or emissions caps, but later versions are expected to include those metrics.

Here is a climate finance classification:

Category	Description	Examples
Climate-supportive	Directly reduces GHG emissions or avoids new emissions	Solar plants, wind farms
Climate-transition	Reduces emissions intensity over time	Industrial retrofits, AUSC thermal
Not-qualified/excluded	Activities with no clear climate benefits	Traditional coal-based energy

A Phased Approach with Sectoral Annexures

India’s climate finance taxonomy will be introduced in phases, not all at once. In the beginning, it will focus on key sectors like:

Power
Industry
Transport (mobility)
Buildings
Agriculture
Climate adaptation (helping communities adjust to climate change)

Later, each sector will get its own detailed guide (called an annexure) to explain exactly what activities count as green or transition-friendly.

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In the future, the system will also include clear numbers and limits, like how much pollution is allowed, how energy-efficient something should be, and the total carbon impact over time. This flexible design means the taxonomy can be updated regularly as technology improves or climate rules change.

Principles Behind the Taxonomy

Principle	Focus Area	Intended Outcome
Country-specific pathways	India's development context	Support local innovation and MSMEs
Do No Significant Harm (DNSH)	Environmental and social safeguards	Avoid unintended damage from investments
Support for transition sectors	Hard-to-abate industries	Encourage clean pathways without exclusion
Transparency and measurability	Performance-based indicators	Enable investor confidence and compliance

This approach keeps the system flexible and practical. By starting small and adding more details over time, India can make sure the taxonomy stays relevant, fair, and up to date with global climate goals and local realities.

Conclusion

India’s new climate finance taxonomy is a roadmap to guide where money should go to truly support climate action. It shows how the country wants to shift financial systems toward cleaner, greener, and more responsible investments, while still keeping room for development and growth.

Now, investors, banks, and industries will have a clear guide to follow. This can help reduce confusion, build trust, and make sure the money meant for climate goals actually reaches the right projects.

If used well, this taxonomy could shape India’s green finance future for the next 10 years. As the final version rolls out soon, all eyes will be on how much progress has been made and what more needs to be done.

It’s a big step in the right direction

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