India is at a pivotal moment in shaping the future of sustainable finance. As the country scales up its climate ambitions, the effective mobilisation of private capital remains a critical challenge. A central obstacle has been the absence of a clear, standardised system for identifying and classifying environmentally sustainable activities. Recognising this gap, the Government of India (GOI) recently released a “draft Climate Finance Taxonomy Framework,” a significant step toward providing much-needed clarity for investors, regulators, and financial institutions.
The draft framework sets out guiding principles, environmental objectives (EOs), and a sectoral structure that will be used to build the taxonomy. This report examines the government’s draft framework and places it in context by comparing it with leading international taxonomies. It argues that for the taxonomy to succeed in mobilising finance at scale, it must be more than just a technical classification; it should function as a practical, inclusive, and dynamic policy tool that reflects India’s developmental realities and capacities. A green taxonomy should not only promote transparency and improve investor confidence but also support a wide range of stakeholders, especially micro, small, and medium enterprises (MSMEs), which often face barriers in accessing green finance due to high compliance costs and limited capacity.
The report explores four interconnected themes that are critical for the effective design and implementation of India’s climate finance taxonomy, all of which are aligned with the priorities articulated in the draft framework:
- Global comparison: We present a comparative analysis of green taxonomy frameworks adopted globally, including those of the European Union (EU), China, the Association of Southeast Asian Nations (ASEAN), Singapore, Indonesia, South Africa, and Australia. The report examines their core structures, classification methodologies, and implementation experiences. While these taxonomies have played an important role in scaling up sustainable finance, many have encountered challenges related to technical complexity, inconsistent data, limited interoperability, and a lack of regulatory integration. This analysis distils specific lessons, both positive and cautionary, for India as it operationalises its taxonomy and tries to offer solutions.
- Mapping of domestic economic activities: A key feature of any taxonomy is the identification of eligible economic activities, which is typically done using domestic or international classification systems. The idea is to create broad, clearly defined categories under which green technologies, projects, and corresponding technical screening criteria (TSC) can be organised. This report undertakes a structured mapping of India’s economic activities using the National Industrial Classification (NIC) system, aligned with international frameworks such as the International Standard Industrial Classification (ISIC). This exercise forms the initial groundwork for identifying eligible activities under India’s taxonomy. While not a standalone tool for determining environmental sustainability, the mapping provides a starting point for defining technical screening thresholds and environmental performance benchmarks in the future.
- MSME inclusion: Recognising that MSMEs play a vital role in India’s economy but are often excluded from climate finance flows, the report highlights the importance of incorporating simplified, proportionate, and flexible evaluation mechanisms tailored to the needs of smaller enterprises. Drawing on examples from countries such as Indonesia and the Philippines, we examine alternative models that could be adapted for India to alleviate the burden of compliance and promote broader participation in the green economy.
- Green technology: The report also focuses on indigenous green technologies and their alignment with the objectives of the draft framework. By analysing innovations in the power, mobility, and agriculture sectors, the study demonstrates how locally developed technologies can contribute to mitigation, adaptation, and transition goals. At the same time, it identifies key barriers to scaling these innovations.
The report explores four interconnected themes that are critical for the effective design and implementation of India’s climate finance taxonomy, all of which are aligned with the priorities articulated in the draft framework:
- Global comparison: We present a comparative analysis of green taxonomy frameworks adopted globally, including those of the European Union (EU), China, the Association of Southeast Asian Nations (ASEAN), Singapore, Indonesia, South Africa, and Australia. The report examines their core structures, classification methodologies, and implementation experiences. While these taxonomies have played an important role in scaling up sustainable finance, many have encountered challenges related to technical complexity, inconsistent data, limited interoperability, and a lack of regulatory integration. This analysis distils specific lessons, both positive and cautionary, for India as it operationalises its taxonomy and tries to offer solutions.
- Mapping of domestic economic activities: A key feature of any taxonomy is the identification of eligible economic activities, which is typically done using domestic or international classification systems. The idea is to create broad, clearly defined categories under which green technologies, projects, and corresponding technical screening criteria (TSC) can be organised. This report undertakes a structured mapping of India’s economic activities using the National Industrial Classification (NIC) system, aligned with international frameworks such as the International Standard Industrial Classification (ISIC). This exercise forms the initial groundwork for identifying eligible activities under India’s taxonomy. While not a standalone tool for determining environmental sustainability, the mapping provides a starting point for defining technical screening thresholds and environmental performance benchmarks in the future.
- MSME inclusion: Recognising that MSMEs play a vital role in India’s economy but are often excluded from climate finance flows, the report highlights the importance of incorporating simplified, proportionate, and flexible evaluation mechanisms tailored to the needs of smaller enterprises. Drawing on examples from countries such as Indonesia and the Philippines, we examine alternative models that could be adapted for India to alleviate the burden of compliance and promote broader participation in the green economy.
- Green technology: The report also focuses on indigenous green technologies and their alignment with the objectives of the draft framework. By analysing innovations in the power, mobility, and agriculture sectors, the study demonstrates how locally developed technologies can contribute to mitigation, adaptation, and transition goals. At the same time, it identifies key barriers to scaling these innovations.
The report shows that India has the opportunity to learn from international experiences while creating a taxonomy that reflects domestic priorities, supports green innovation, and expands access to finance for all stakeholders, including MSMEs. The recommendations presented in the final section aim to help bridge the gaps, ensuring that the taxonomy becomes a credible, interoperable, and widely adopted tool. If executed effectively, India’s taxonomy can set a global benchmark for emerging economies.
This paper can be accessed here.
This paper is authored by Renu Kohli, economist and Kritima Bhapta, research associate, CSEP, New Delhi.