Context

·       In May 2025, the Ministry of Finance unveiled India’s draft Climate Finance Taxonomy for public consultation. This initiative is designed to steer investments towards climate-aligned sectors, combat the growing risk of greenwashing, and offer clear guidance to investors on which technologies and industries contribute to mitigation, adaptation, or transitional objectives. By declaring itself a “living” framework, the taxonomy acknowledges the need to evolve in tandem with India’s domestic priorities and global climate responsibilities.

·       However, the success of this dynamic vision will depend on how effectively it transitions from paper to practice. This article explores the foundational requirements for implementing the taxonomy: a robust review architecture, legal and content clarity, and institutional accountability mechanisms.

Review Architecture: Creating an Adaptive Yet Predictable System

·       For India’s climate taxonomy to instil trust among investors and meet both domestic and global standards, it requires a clearly defined and multilayered review structure. A well-organised review mechanism will not only enhance legal precision but also ensure responsiveness to fast-changing market conditions and policy landscapes.

·       The design of this system can draw from international precedents, particularly the supervisory mechanism under Article 6.4 of the Paris Agreement. A two-tiered approach can help balance agility and long-term resilience.

·       Annual reviews will serve as the mechanism for addressing short-term gaps in implementation, responding to evolving regulatory obligations, incorporating policy updates, and integrating stakeholder feedback. These reviews must be conducted on a predictable schedule, with defined timelines, uniform documentation protocols, and mandated public consultations to maintain transparency and credibility.

·       Complementing these, comprehensive five-year reviews will offer an opportunity to reevaluate the taxonomy against broader shifts such as international carbon market trends, evolving definitions of climate finance, and India’s own sectoral transitions. Aligning these deeper reviews with India’s Nationally Determined Contributions (NDC) cycle and the global stocktake under the UNFCCC would ensure coherence with international climate governance timelines.

·       Together, these short- and long-term review cycles would enable the taxonomy to remain both responsive to immediate needs and durable against long-term challenges.

Substantive Clarity: Legal Consistency and Accessible Content

·       Beyond establishing review timelines, the substance of these reviews must address two critical dimensions — legal coherence and clarity of content.

·       Legal coherence requires harmonisation between the taxonomy and existing Indian legal frameworks such as the Energy Conservation Act, SEBI’s regulatory guidelines, and the Carbon Credit Trading Scheme. These legal connections must be clearly mapped to ensure enforceability, remove duplication, resolve jurisdictional overlaps, and align the taxonomy with fiscal tools such as green bonds, blended finance instruments, and mandatory risk disclosures.

·       Content clarity is equally vital to ensure the taxonomy is not only technically robust but also accessible to a wide array of users — from institutional investors to MSMEs and local government bodies. Definitions must evolve in line with global market standards while remaining intelligible to both experts and laypersons. Quantitative benchmarks — such as emission reduction thresholds or energy efficiency norms — must be regularly updated using reliable data sources and stakeholder feedback to reflect technological advancements and policy shifts.

·       In particular, the taxonomy must adopt an inclusive lens. Ensuring that sectors such as agriculture, small-scale manufacturing, and the informal economy are not excluded is crucial for equity and participation in India’s net-zero journey. This requires designing simplified entry points, phasing compliance obligations, and adopting realistic expectations for sectors with lower technical capacity or access to finance.

Institutionalising Accountability and Transparency

·       To operationalise this complex and evolving taxonomy, the Ministry of Finance must take the lead in institutionalising its governance. Establishing a dedicated unit within the Department of Economic Affairs would centralise oversight and provide continuity in review processes.

·       This unit should also implement mechanisms for public engagement and transparency. Digital dashboards can be used to collect inputs from stakeholders, flag implementation bottlenecks, and publish ongoing reports and updates. Such tools will enhance predictability and enable real-time course correction, ensuring that the taxonomy remains grounded in practice rather than only existing in principle.

·       Annual summaries of review findings and comprehensive five-year revision proposals should be made publicly accessible in a consolidated format. This level of transparency will bolster investor confidence, enhance the credibility of the taxonomy, and ensure better integration with adjacent frameworks such as India’s carbon markets, green bond regulations, and mandatory sustainability disclosures.

Conclusion

·       The launch of India’s climate finance taxonomy comes at a critical juncture, coinciding with significant shifts in the broader climate finance landscape. The operationalisation of the Carbon Credit Trading Scheme, increasing reliance on green bonds, and the need to align public expenditure with India’s long-term climate goals all underscore the urgency of a strong, credible, and adaptable governance tool.

·       A taxonomy that lacks transparency, clarity, or accountability could undermine rather than support these crucial developments. Therefore, it is essential that the taxonomy lives up to its promise as a “living document.” Its continued relevance will depend on how rigorously it is reviewed, how transparently it is revised, and how effectively it engages all stakeholders — from government agencies and investors to local communities and emerging sectors.

·       Only through such a holistic, structured, and participatory approach can the taxonomy serve its intended purpose — guiding India’s climate finance ecosystem toward a low-carbon, resilient, and inclusive future.