Making the Taxonomy Work for India: From Framework to Climate Action

Introduction

As the Global South scrambles to secure much-needed financial support to address its disproportionate climate burdens, the absence of frameworks to track, define, and facilitate climate-aligned finance is a strategic vulnerability. In this context, climate taxonomies must function as instruments, and not merely documents. Their growing adoption has reinforced their omnipresence in global climate systems (see Figure 1). This near-exponential rise indicates a rapid shift towards a taxonomy-driven climate systems, underscoring the transformative potential of instrumental taxonomies. In this regard, India has only recently taken its first step with the release of the draft Framework of Climate Finance Taxonomy in 2025.

Figure 1: Occurrence of Taxonomy-Tied Climate Systems (2015-2025)

Source: Climate Bonds Initiative, Taxonomy Roadmap Initiative partners^[1]

For India, the stakes are particularly high, with estimated climate finance needs ranging from US$160 billion to US$288 billion annually.^[2] A taxonomy is especially critical given that domestic public finance alone cannot meet this requirement. The country’s high debt-to-GDP^[3] further constrains fiscal space, limiting its ability to support development needs, let alone scale climate action. In this context, funding must come from high-income, high-emission actors—namely, the private sector and the Global North.

To add India’s ambition to the mix, the coming decades are expected to see higher demand, output, productivity, and emissions, alongside rising social costs. In this context, reducing emission intensity, enforcing caps, and offsetting existing emissions become unavoidable. Authentic climate action is therefore non-negotiable. To meet binding commitments under its Nationally Determined Contributions, the 2070 net-zero target, the 2030 Panchamrit goals, and the longer-term 2047 Viksit Bharat vision, India must address greenwashing more seriously. This requires accurate climate data, transparency, and genuine government enforcement, rather than reliance on social pressure alone. This is where a climate finance taxonomy offers value: directing financial flows towards areas of scarcity, establishing guiding frameworks for enforceability, and setting standards for social safeguards.

At present, India lacks both a standardised monitoring framework for climate data and financing at the scale required to meet its stated ambitions. To mobilise funding, clearly identifiable and lucrative areas of financial deficit must be standardised across jurisdictions. If done holistically, such standardisation can minimise greenwashing risks and maintain environmental integrity, ensuring that development goals and trajectories are upheld. However, achieving this trifecta requires viewing and designing the taxonomy as a critical infrastructure. Its value lies not only in its foundational nature but also in its ability to serve as a reference point for enforceable national climate programmes.

The following sections explore the characteristics of India’s current framework and suggest changes and additions to the principles required for the taxonomy to achieve the objectives outlined in the draft.

India’s Draft Climate Finance Taxonomy Framework

Objectives

The defining characteristics of a sustainable climate finance taxonomy lie in its core objectives. In India’s case, these objectives are framed around three necessities, as illustrated in Figure 2. The taxonomy identifies three climate components: mitigation, adaptation, and hard-to-abate sectors.^[4] These are assessed through cross-sectoral measures, projects, and activities for their alignment with the taxonomy.

The core concept of India’s approach is the emphasis on making the taxonomy actionable, achievable, and usable. These objectives underscore the need for a functional framework that facilitates financial flows and reduces greenwashing. Achieving this requires the taxonomy to establish its role as a dynamic enforcement mechanism.

Figure 2: Objectives and Principles of India’s Draft Taxonomy Framework

Source: Author’s own

Principles

The draft outlines eight principles to guide the “classification, identification and delineation of criteria, activities, projects and technologies.”^[5] These principles are intended to ensure that the taxonomy facilitates the achievement of its objectives. While all principles indirectly support the three objectives, each is more directly aligned with specific goals. Figure 1 highlights each objective and the principles that categorically correspond and contribute to it.

While these principles establish a foundational structure, they do so primarily by setting criteria for classification. The language employed delineates rather than directs the nature of climate activity to be undertaken. In this sense, the principles and objectives operate at cross-purposes: the objectives call for action, while the principles offer suggestions rather than clear guidelines for achieving them. Indeed, the characteristics of the framework provide further support for this dissonance in achievements wanted and designs provided.

Features

a. Categorisation of Climate Activities

Based on these principles, the draft formulates tranches to acknowledge the layered nature of climate impacts. The taxonomy categorises activities, technologies, and policies into “Climate Supportive” and “Transition Supportive” tranches.^[6] Within the Climate Supportive tranche, the draft further recognises that not all activities intended to generate positive impacts deliver the same degree of outcomes. Accordingly, “Tier 1” and “Tier 2” represent higher and lower overall positive impact, respectively.

Activities qualify as Climate Supportive if they contribute to one or more objectives through at least one of the following:

• Avoiding GHG emissions
• Reducing emission intensity
• Deploying adaptation solutions that reduce climate risk
• Undertaking R&D aligned with the framework’s objectives

In the same draft, Transition Supportive activities are defined as “activities, projects and measures for which there is no technologically and economically feasible low-emission alternative in India.”^[7] This distinction separates activities that actively produce positive climate outcomes from those that are not inherently supportive but enable a transition away from high-emission pathways.

Gaps

The crux of the issue lies in the absence of mutually exclusive criteria between the two categories, leaving room for overlap. This is evident in the definitions of Climate Supportive Tier 2 and Transition Supportive Activities:

• Climate Supportive Tier 2: Activities, projects, or measures that improve energy efficiency and/or reduce emission intensity in sectors where absolute emission avoidance is not currently viable due to the lack of or non-viable alternative technology, and that also contribute to adaptation and resilience building.

• Transition Supportive: Activities, projects, or measures that improve energy efficiency and/or reduce emission intensity in sectors where absolute emission avoidance is not currently viable due to the lack of alternative technology.

These definitions indicate that the classification of energy efficiency activities in hard-to-abate sectors depends on whether adaptation benefits are demonstrated. In the absence of clear adaptation thresholds, this creates scope for inconsistent classification. As the draft does not specify empirical thresholds, the level of impact required, particularly for adaptation benefits, remains unclear.

b. Phased Implementation and Dynamic Development 

Another key feature of the draft is its phased implementation of the taxonomy, recognising its evolving scope and depth. This is reflected in its design as a “living document”.^[8] The phased approach aims to ensure transparency, clarity, and alignment with India’s development goals. It also acknowledges current limitations in data availability, monitoring, and capacity. Accordingly, the first phase proposes a qualitative framework aligned with national priorities, such as inclusive growth, the Net Zero goal by 2070, and sector-specific low-carbon pathways, while the second phase introduces quantitative thresholds and benchmarks to enable greater precision. This approach provides flexibility in light of India’s growth trajectory and its large Micro, Small, and Medium Enterprises (MSME) base, supporting fairness and proportionality. It also allows for technological progress and sectoral differentiation without imposing premature rigidity.

Gaps

“Greater precision” is anticipated, but the second phase is not designed to deliver it. The “quantitative” phase proposes comparative thresholds framed as “relative performance targets” rather than absolute ones. For example, progress is assessed through “percentage improvements” rather than against fixed limits.^[1] With low baselines, little improvement may be rewarded while significant gaps from absolute targets remain unaddressed. In the absence of near-term technical thresholds, the taxonomy risks undermining its core objectives of transparency, clarity, and alignment.

The phased approach also warrants closer scrutiny of additionality and permanence. As a living document, thresholds must be updated to reflect technological advances and potential emission reductions. Failure to do so could allow hard-to-abate sectors to continue emitting at elevated levels, raising questions about the additionality of reported reductions. Permanence, specifically in corporate sustainability practices, also requires attention and should be incorporated into adaptation criteria and benchmarks to ensure actual outcomes.

c. Development Sensitivity

The framework emphasises feasible, inclusive, and proportionate climate obligations, especially for MSMEs. It acknowledges the role of India’s large MSME base in its emissions profile and affirms their inclusion under the taxonomy, while recognising variations in capacity across sectors and firm sizes. To ensure proportionality, the taxonomy proposes a “staggered approach with simplified criteria and processes to reduce the burden of adoption in view of their technological and resource constraints while encouraging their participation in climate initiatives.”^[9] In essence, MSMEs are subject to tailored thresholds, simplified reporting, and targeted capacity-building measures. This focus on feasibility, inclusion, and proportionality is central to shaping India’s long-term trajectory.

Gaps

While the taxonomy provides a strong foundation by incorporating tailored MSMEs from the outset, it falls short in operationalising its commitments to feasibility, inclusivity, and proportionality across other socio-economic dimensions. The absence of provisions for standardising Monitoring, Reporting, and Verification (MRV) procedures, establishing financial absorption channels, signalling mechanisms for financial constraints, and ensuring accountability of local representation undermines the credibility of a holistic taxonomy aligned with these aims.

d. Sectoral Coverage

At its initiation, the taxonomy’s scope is limited to select sectors, with each considered along a single dimension. According to the draft:

“Power, Mobility, and Building sectors will be considered in the context of climate mitigation and adaptation co-benefits. Agriculture, food, and water security will be limited to the context of climate adaptation and resilience building. Addressing transition, in line with country circumstances, hard-to-abate sectors like iron and steel and cement shall be considered at the outset.”^[10]

Gaps

The sectoral coverage raises three concerns: inconsistency, insufficiency, and incompleteness. The draft includes only a limited set of sectors and justifies this through its design as a “living document”, allowing for future expansion.

While this flexibility is necessary, it does not justify the exclusion of high-impact sectors. The current scope shows limited and inconsistent overlap with existing national climate programmes that cover additional high-emitting and adaptation-focused sectors. More importantly, the framework is incomplete in how it maps sectoral roles in climate impacts. For example, Agriculture, a sector heavily contributing to emissions and energy use in India,^[11] has only been included from an adaptation point of view in this draft.

Figure 3: Summary of Key Features and Corresponding Gaps

Source: Author’s own

These gaps warrant attention as they directly affect the taxonomy’s three core objectives. As illustrated in Figure 3, the risk of greenwashing increases due to unaddressed aspects across key features. The goals of mobilising finance and keeping India on track with its targets are also undermined by the limited sectoral scope, the exclusion of development criteria, and the absence of enforceable quantitative standards. These gaps highlight a crucial mismatch in the objectives to be achieved, the design created, and the principles the taxonomy is equipped with. To better align the framework with the intended objectives, the paper proposes two modifications and four additions to the existing the principles along with recommendations on putting them to action.

Recommendations for Refinement

Given the gaps in the current draft taxonomy framework, a recalibration of its guiding principles is essential to better align with its core objectives. The first of the succeeding sections offers principles and recommendations pertaining to the first objective of facilitating greater resource flows. This is followed by the second objective of preventing greenwashing and the third objective of maintaining consistency with ‘Viksit Bharat’. Each principle is followed by recommendations for operationalising it within the taxonomy.

Objective 1: Facilitating Greater Resource Flows

Principle of Internal and External Interoperability

a. Standardised Sectoral Scopes

The draft treats interoperability primarily as alignment with international frameworks to attract global capital. While external finance is vital, capital alone cannot offset India’s fragmented domestic climate architecture, marked by overlapping schemes, divergent metrics, reporting fatigue, and inefficient spending.

A national taxonomy could serve as a unifying framework to standardise and streamline these efforts. Yet the draft does not embed this integrative role in its design. To be effective, it must expand its sectoral scope and align more closely with India’s climate commitments and national programmes, ensuring coherence alongside capital mobilisation.

ASEAN’s and Singapore’s Cases

The first draft of the ASEAN taxonomy^[12] included ten climate-impacting sectors within its scope. In addition to those covered in the Indian draft, ASEAN included fisheries, forestry, air conditioning supply, information and communication, and professional, scientific and technical activities. These sectors were prioritised using three methodologies to assess GHG emissions and gross value generated.

Singapore’s taxonomy,^[13] which also upholds a century-focused approach, includes industries such as chemicals, cement, iron and steel, hydrogen, aluminium, plastics, energy and efficiency technologies, and transport. This reflects both current emission levels and the role of the industrial sector in fossil fuel phase-out and future emissions. Moreover, the sectoral scope was determined based on its usability within regional frameworks and standards.

Lessons for India

Given this level of sectoral inclusion, India’s taxonomy appears to have a relatively narrow scope. The draft excludes several sectors recognised under the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI)’s sustainable finance frameworks, including pollution prevention, biodiversity conservation, waste management, and sustainable land use. At the same time, it includes hard-to-abate sectors such as iron, steel, and cement that are not yet covered under existing RBI^[14] or SEBI^[15] classifications. This lack of sectoral harmonisation poses a further challenge in light of the rollout of the Carbon Credit Trading Scheme (CCTS) and the parallel development of compliance and voluntary carbon markets.^[16] Sectors participating in these markets are, by design, undertaking emission-reducing activities but remain partially excluded from the taxonomy. Given the emission-reduction efforts and financial investments under the CCTS, it is essential that these sectors be recognised within the taxonomy to facilitate financial flows and support the development of key technologies.

Such inclusion would act as a compliance incentive by enhancing visibility and credibility, thereby increasing the likelihood of attracting capital, as intended by a unified taxonomy. Crucially, this alignment could reshape market behaviour. The prospect of greater access to capital can encourage entities to pursue deeper emission reductions rather than relying primarily on credit-based compliance. Additional financial incentives for them can help address supply constraints while reinforcing environmental integrity.

In addition to sectors covered under Indian initiatives, the taxonomy should account for the implications of the Carbon Border Adjustment Mechanism (CBAM). Expanding the scope to incorporate CBAM sectors like aluminium and fertilisers would support monitoring and reduce exposure to high emission-related trade costs.^[17] Notably, many of these sectors are covered under the CCTS and sustainable finance frameworks. A more holistic sectoral approach could also help capture scope 3 emissions that generally go unnoticed.

With a foundational classification system in place, quantitative thresholds can be determined sequentially for each sector. Adaptation and resilience co-benefit criteria can be applied across sectors alongside the development of specific metrics for different types of adaptive action. In other words, being in the development stage does not justify sectoral exclusion.

Principle of Facilitating Financial Absorption

a. Green Tagging: A Step Ahead of Green Labelling 

Singapore’s green labelling traffic-light system is equivalent to the categorisation in India’s draft taxonomy, but it explicitly signals that activities are expected to transition from ‘amber’ to ‘green’. Even within a climate and transition-supportive tier system, such a signalling mechanism could benefit India by driving climate action and directing financial support to areas where it is lacking.

Singapore’s Case

Under this framework, activities are classified as Green, Amber, or Ineligible based on their emissions profile, decarbonisation trajectory, and long-term sustainability.^[18] ‘Amber’ activities capture transitional infrastructure that is not yet fully aligned. Activities that fail to meet either standard are deemed ‘Ineligible’, signalling misalignment and preventing the mislabelling of high-emitting or structurally unsustainable assets. This offers crucial market signalling of where funds are being allocated and where transition is happening quicker. The Singapore model offers a practical blueprint for how taxonomies can remain dynamic while providing clear market signals.

Lessons for India

Importantly, a green labelling framework need not be static nor limited to a binary classification of climate-supportive versus transition-supportive activities. The ‘ineligible’ label allows the taxonomy to clearly exclude activities that exceed thresholds for transition alignment. While these labels help ensure taxonomy and climate alignment, they can be further operationalised. To facilitate financial deficit mapping through taxonomy alignment, a complementary green “tagging” system can be introduced to direct flows to areas of need.

In its initial phase, labels can function as baseline indicators of alignment, while a complementary green tagging system can provide additional granularity by specifying the objective through which alignment is achieved, such as mitigation, adaptation, cross-cutting outcomes, loss and damage, and/or resilience building. As quantitative thresholds are introduced, both labels and tags can be progressively tiered to reflect varying levels of performance and impact. This differentiation allows the taxonomy to capture the multidimensional nature of climate action. Over time, a combined labelling and tagging framework can also play a catalytic role in driving structural transformation by incentivising indigenous technological innovation in sectors lacking mature low-carbon alternatives.

Crucially, green tagging can support the mobilisation of internal private capital. A taxonomy that clearly identifies underfinanced climate-positive activities can serve as a strong signal for domestic development banks, Non-banking Financial Companies (NBFCs), and green financing agencies. The current constraints are not only a lack of capital driven by unwillingness or limited awareness, but also misallocation and information gaps. Solving both these problems and essentially creating a clear pipeline of bankable positive projects is necessary to facilitate domestic capital from the private sector.

Objective 2: Preventing Greenwashing

Principle of Enforceability

a. Interim Thresholds

Given India’s emerging trends, the evolving nature of climate-efficient technologies, and ongoing capacity-building efforts for climate data, it is understandable that concrete, quantifiable metrics may be developed in Phase 2. Yet, leaving the taxonomy devoid of measurable benchmarks makes it inoperable and ineffectual in the short run. Sectoral taxonomy alignment with institutional entities and schemes can then be beneficial for taxonomy design.

Singapore’s Case

The first consultation of the Singapore-Asia taxonomy, published by the Green Finance Industry Taskforce (GFIT),^[19] included detailed analyses of emission data and sectoral economic activity, collated from existing international and domestic databases. The second iteration introduced^[20] interim thresholds based on available data and domestic climate commitments, allowing sectoral standards to be upheld while technical criteria were under development. Comparative thresholds were established using common metrics such as primary energy demand, energy intensity, and electricity generation. This approach relied on existing domestic reporting standards that the taxonomy could adopt during the interim period.

Lessons for India

A similar approach is possible in India. In the interim period, before Phase 2 establishes quantitative thresholds, existing intensity targets under the CCTS, PAT scheme, and other reporting mechanisms can serve as credible short-term standards. These targets can ensure that emission reductions are assessed against recognised benchmarks rather than treated as undifferentiated, lump-sum reductions.

A similar approach can be adopted for adaptation and resilience assessments. While adaptation outcomes are more context-specific, semi-quantitative indicators of the benefits achieved can be drawn from the Green Credit Programme (GCP),^[21] state action plans, and national climate policy reports, which are designed to measure and quantify impacts from adaptation and resilience projects. Such alignment will require careful cross-referencing of activity lists across schemes, but this is both feasible and necessary.

b. Unified MRV and Data Regulation

To ensure enforceability and alignment with the taxonomy’s targets, its design must extend to a well-defined, standardised system for monitoring, reporting, and verification (MRV) across overlapping national programmes. Integrating pre-established MRV reporting measures can significantly amplify climate-friendly activity across both mitigation and adaptation by enabling interoperability between Indian schemes.

EU’s Case

To remain competitive, reduce compliance costs, unlock investment, and support corporate transition, the European Union has introduced the Omnibus Package. It includes amendments to reporting frameworks such as the Corporate Sustainability Reporting Directive (CSRD)^[22] and the Corporate Sustainability Due Diligence Directive (CSDDD).^[23] These simplification measures are particularly beneficial for SMEs. With a large MSME base in India, standardising reporting requirements via uniform minimum MRV criteria offers large economy-wide benefits.

Lessons for India

A unified MRV standard can centralise India’s climate tracking across a few national schemes, rather than relying on institutionally dispersed mechanisms. As seen with the PAT scheme, transitions into the CCTS can be smoother with pre-established reporting standards. This could free up financial resources for investment in low-carbon technologies and expedite emission reductions. Similarly, if Green Credit Programme projects are reported through a taxonomy-aligned MRV framework, they could become eligible for credit trading under offset mechanisms as climate tracking becomes more centralised. Such unification can enhance the attractiveness of climate projects by improving comparability and enabling clearer assessments of financial viability.

A common reporting framework under the taxonomy can reinforce its proportionality principle, making MRV more feasible for MSMEs. Crucially, MSMEs could leverage a single reporting exercise across multiple programmes to access diverse financial incentives. As the Carbon Credit Trading Scheme (CCTS) expands to include smaller-scale units, such integration would be essential not only for compliance but also for ensuring market buoyancy and sustained participation from the smaller-scale sectors. Indeed, standardising MRV entirely can be challenging. Nonetheless, elements such as conversion methodologies, units of measurement, data collection, sampling and analysis tools, and data eligibility criteria can be defined.

However, a standard monitoring and reporting system is ineffective without an accessible data repository. Climate data in India remains fragmented in both creation and release, leading to resource-intensive collation and delays in reporting. Even then, data is rarely available in usable public formats. These constraints underpin broader challenges in data, regulation, and reform. The taxonomy has the platform to standardise levels of data reporting via a technological architecture that can be made active and publicly accessible. This change stands at the heart of the principle of transparent and science-based climate action.

c. Sharper Category Definitions and Exclusionary Criteria

Clear and precise category definitions in a climate finance taxonomy are essential to prevent ambiguity, avoid mislabelling of activities as “green” or “transition,” and ensure that capital flows truly support climate goals. Sharper definitions enhance transparency, facilitate consistent assessment by financial institutions, and strengthen market credibility, making the taxonomy a more effective tool for driving measurable climate action.

Australia’s Case

The multifaceted value of such clarity is demonstrated by Australia’s taxonomy, which explicitly differentiates between ‘Green’ and ‘Transition’ tiers to account for activities and technologies at different stages of decarbonisation maturity.^[24] Under this approach, only activities and enabling technologies already aligned with a low-emissions economy are classified as Green. Activities in hard-to-abate sectors that cannot yet meet these thresholds but can demonstrate credible and measurable reductions in Scope 1 and 2 emissions, are placed in a distinct Transition category. The framework also incorporates exclusionary criteria for each sector to ensure that activities are evaluated holistically before classification.

Lessons for India

The draft’s categorisation of climate- and transition- supportive activities is blurred at the boundaries. By definition, both include activities “that improve energy efficiency and/or reduce emission intensity in sectors where absolute emission avoidance is currently not viable due to the lack of or non-viable alternative technology.” As a result, the distinction between climate-supportive Tier 2 activities and transition-supportive activities rests primarily on the requirement that the former must “also contribute to adaptation and resilience building.”^[25] In the absence of quantitative or qualitative thresholds, this distinction is difficult to operationalise. It risks inconsistent classification, allows non-standardised interpretation, and creates scope for greenwashing. In such conditions, a more distinct and mutually exclusive classification system would serve as a useful corrective.^[26]

Presenting exclusionary criteria, specifically for adaptation and resilience co-benefits that are generally difficult to assess, can help reduce maladaptive activities in the interim. This approach strengthens the taxonomy’s signalling function by recognising transitional emissions reductions without conflating them with activities already aligned with a 1.5°C pathway, thereby improving usability and credibility for investors, regulators, and project developers. It simultaneously allows room for transition activities to mature into climate supportive activities while being held accountable in their nascent stages as well. Nonetheless, in the long run, transition activities must be converted to active climate actions.

d. Semi-Mandatory Taxonomy Use

A hybrid taxonomy combines enforcement, credible climate action, shared responsibility, and proportionality. For India, a calibrated hybrid approach may offer the most appropriate pathway. A partially mandatory taxonomy could be operationalised by linking alignment to specific regulatory or financial touchpoints, rather than imposing blanket obligations across the economy.

EU’s and Singapore’s Cases

The European Union provides a useful example. Under the Corporate Sustainability Reporting Directive (CSRD), companies must report the share of economic activities that fall within the sustainability criteria of the EU taxonomy. This includes both taxonomy eligibility (which activities are covered) and taxonomy alignment (which activities meet the criteria).^[27] Singapore’s Taxonomy^[28] follows a similar reporting structure. While it does not mandate reporting, it provides a foundation for disclosure requirements, including:

• Revenue breakdown by taxonomy-eligible activities, or allocation of capital expenditure (CapEx) and/or operating expenditure (OpEx) to such activities.
• Performance against technical screening criteria, or use of environmental management data as a proxy, including DNSH assessment
• Management data on social issues, including labour rights policies, management systems, audits, and reporting.

Lessons for India

These lessons can be operationalised in several ways. Disclosures required under the Business Responsibility and Sustainability Reporting (BRSR) framework can be integrated into the taxonomy. As in the EU, reports can distinguish between taxonomy eligibility and taxonomy-aligned activities for entities mandated to report under BRSR. This differentiation helps identify economic activities that are eligible but not yet compliant, highlighting where financial and administrative support is needed to drive climate impact. A company’s degree of alignment can thus serve as a benchmark for its level of climate compliance.

Large corporations and high-emitting sectors can be required to report taxonomy alignment, while MSMEs can transition gradually through principle-based requirements. Singapore’s reporting formats can be adapted to the Indian context. Voluntary reporting can also be encouraged with the incentive of greater visibility for financial support. This can ensure legally binding alignment for large corporations as under the EU taxonomy while ensuring a transitional MSME specific pathway as curated by the Indonesian Taxonomy.^[29]

A mandatory or hybrid-mandatory framework also addresses greenwashing risks, reduces interpretive discretion, improves data comparability, and strengthens supervisory oversight. Over time, this can build trust among domestic and international investors.

e. Autonomous Governing Body

The question of enforceability is moot without an enforcing body. While the taxonomy itself is not the subject of enforcement, it is the instrument through which enforcement operates. If left dormant, it loses its function and reduces to a classification document. For the taxonomy to remain effective, it must be treated as a living document, with its implementation and evolution overseen by a governing body. At present, authority over the taxonomy remains unclear.

Singapore’s Case

The Monetary Authority of Singapore (MAS) manages the Singapore-Asia Taxonomy.^[30] Under MAS, the Green Finance Industry Taskforce (GFIT)^[31] was established to streamline sustainable finance efforts and develop a comprehensive climate finance ecosystem. One of its key achievements was the development of the Singapore taxonomy. The taskforce brought together representatives from financial institutions, corporates, non-governmental organisations, and industry associations under government oversight. This ensured that the taxonomy’s primary users were directly involved in shaping it.

Lessons for India

The draft framework of India’s Climate Finance Taxonomy has been developed under the Ministry of Finance by the Department of Economic Affairs. While it has been released for external consultation, the draft does not document the incorporation of industry expertise or the governance insights of private climate finance actors and multi-level government agencies. This may explain the uneven sectoral inclusion and ambiguous mitigation and adaptation thresholds. Greater engagement with private capital providers and government agencies can lend the taxonomy both technical rigour and practical perspective. As in Singapore, drawing on industry input can help address barriers to efficient capital mobilisation and deployment.

An autonomous committee comprising representatives from the Ministry of Finance, key financial regulators such as SEBI and RBI, as well as officials from major national climate schemes (e.g., CCTS, PAT, and the Green Credit Programme (GCP)), should be constituted alongside industry experts. Given the technical breadth of the taxonomy, sectoral representation within this committee is essential.  High-emitting sectors like electricity, transport, and coal should be actively consulted in developing sector-specific technical screening criteria. Lastly, the governing body should include expertise on DNSH criteria to ensure comprehensive and credible classification.

Eventual Phase-Out of the Transition Supportive Tranche

a. Criteria Sunsetting 

The premise of a transitional activity is that it ultimately qualifies as climate-supportive. However, without a sunset clause on transitional eligibility criteria, sectors may continue operating at inefficient levels even when more efficient alternatives are available. The case of Indonesia shows that inadequate or vague definitions of transition activities can lead to mislabelling and erode market confidence.^[32] Sunset provisions are therefore a necessary feature of an effective taxonomy.

ASEAN’s and Singapore’s Cases

Drawing on the ASEAN taxonomy model,^[33] a formal mechanism to review and update technical screening criteria every five years, or earlier in response to technological change, would help systematically move transition activities into climate-supportive categories. From Singapore’s perspective, the ‘amber’ or transition category is treated as a ‘catch up’ phase for hard-to-abate sectors to align with future pathways. Accordingly, a clear end date for transitional activities is set based on national capacity and financing ability. In Singapore’s case, the general sunset timeline is 2030. At the same time, the taxonomy allows flexibility for the most hard-to-abate sectors to take longer to converge towards net-zero pathways.^[34]

Lessons for India

As technical screening criteria are developed under the Indian taxonomy, they must evolve alongside advances in climate-supportive technologies and tightening emission pathways. For transition-supportive activities to move progressively into the climate-supportive tier, criteria should be periodically recalibrated to reflect technological availability and feasibility, ensuring that transitional classification does not become permanent. India’s stated intention to align with the Multi-Jurisdiction Common Ground Taxonomy^[35] further supports this approach by enabling regular benchmarking against peer taxonomies and emerging international best practices.

Regular updates to technical screening criteria should be accompanied by clearly defined sunset clauses. Following Singapore’s approach, embedding a decarbonisation roadmap within the taxonomy can help establish concrete timelines. As the Indian taxonomy is designed to be a ‘living document’,^[36] changes to screening criteria and sunset criteria and sunset timelines should be announced at least one year in advance, aligned with the conclusion of the penultimate review cycle. This would provide stakeholders with sufficient notice and planning certainty, reducing the risk of delays and missed emission-reduction opportunities.

Principle of Science- and Evidence-based Approach

a. Explicit Additionality and Permanence Criteria 

Global Scenario

Additionality and permanence are essential principles of climate action, yet global taxonomies rarely incorporate them explicitly. Carbon markets frameworks,^[37] however, recognise the risks of diluted environmental integrity and overestimated outcomes. Drawing on these frameworks, taxonomies should embed additionality and permanence within their categorisation process.

As taxonomies set forward-looking decarbonisation pathways and rely on technological progress, additionality becomes critical. As technologies evolve and make climate outcome more feasible, impacts once considered ‘sufficient’ should no longer qualify as additional. Additionality must therefore be assessed dynamically, in line with technical progress. Similarly, in assessing taxonomy alignment at the corporate level, activities cannot be considered climate-supportive if their effects are not durable. Permanence criteria should require that mitigation and adaptation outcomes are sustained over an appropriate time horizon and are not easily reversible.

Lessons for India

India has the opportunity to move ahead of the curve. At present, the absence of clear requirements on permanence and additionality in mitigation activities risks overstating climate impact and weakening investor confidence. Similarly, adaptation projects are increasingly scrutinised for demonstrating both additionality and permanence. The absence of clear standards for these necessary qualities within a taxonomy leaves room for projects reporting lax targets and achievements that would have happened regardless of their existence.

To embed permanence and additionality entirely, the taxonomy can use the Detailed Procedure for Offset Mechanism under CCTS as a foundational framework^[38] or from other existing Indian literature.

Objective 3: Consistency with Viksit Bharat @2047

Detail DNSH Criteria

The draft explicitly provides for the inclusion of ‘Do No Significant Harm’ (DNSH) criteria. In line with standard taxonomy practice, DNSH identifies environmental and socio-economic spillovers associated with activities and projects to ensure the absence of negative externalities. However, the draft does not specify these cross-sectional dimensions. The EU taxonomy outlines six DNSH objectives, covering climate mitigation and adaptation, water use, the circular economy, biodiversity, and pollution prevention.^[39] Similarly, the Singapore taxonomy includes five environmental objectives, extending to resource resilience and ecosystem health. In contrast, the Indian taxonomy focuses on mitigation, adaptation, and transition from a climate-outcomes perspective, without explicitly addressing safeguards against spillovers. While the taxonomy should clearly define the scope of its DNSH criteria, certain spillovers warrant particular attention in the Indian context.

Notably, in the Singapore taxonomy, these DNSH criteria are framed as objectives rather than safeguards, shifting their role from risk prevention to outcome generation.  Accordingly, DNSH should not only minimise harmful impacts but also incentivise positive outcomes as subsidiary objectives. This is especially important given the interlinkages between these domains and core climate goals. For example, improvements in pollution control and biodiversity protection can also contribute to emission reduction.

a. Indigenous Consultation and Representation 

Indigenous knowledge is a critical resource for designing effective adaptation and mitigation programmes.^[40] Such knowledge is often highly context-specific and embedded in local institutions, offering insights into ecosystems, biodiversity, and landscape dynamics. India’s Nationally Determined Contribution^[41] and the National and State Action Plans on Climate Change^[42] recognise the importance of indigenous consultation in climate action. Incorporating these perspectives can strengthen the taxonomy’s ability to distinguish between nominally adaptive activities and those that deliver genuine, long-term resilience. In the interest of climate justice, traditional value conservation, and tailored adaptation and mitigation, indigenous consultation in adaptation criteria setting should be mandated.

New Zealand’s Case

At present, the Aotearoa New Zealand Sustainable Finance Taxonomy^[43] is among those that explicitly recognise and incorporate indigenous consultation. Its recommendations position the inclusion of indigenous communities and knowledge as a core principle.^[44] New Zealand operationalises this by incorporating indigenous representation from local communities and environmental custodians into both criteria-setting processes and the governing committees of the taxonomy itself.

Lessons for India

Following New Zealand’s approach, India can embed local consultation into adaptation and mitigation planning at granular levels. The example of mangrove plantation illustrates this challenge. Mangrove restoration is widely recognised as a high-impact adaptation and resilience activity. Yet, in several local contexts, mangrove plantation initiatives undertaken in ecologically unsuitable areas have proven to be unsustainable and, at times, damaging to existing ecosystems and the livelihoods of communities dependent on them.^[45] Indigenous knowledge of local soil conditions, biodiversity, and livelihood patterns reveals that blanket mangrove afforestation cannot be treated as sufficient evidence of adaptation or resilience contribution.

In such a case (for example), local consultation can inform taxonomy to define mangrove plantation activities as climate supportive if and only if they are undertaken in areas conducive to it. Thus, indigenous consent and information can be made a mandatory step in labelling any activity as adaptation focused and climate supportive. In this interest, entities undertaking adaptation and resilience activities must undergo and disclose ground-level accounts and local consultation to label their activities as climate supportive. This step can especially be crucial in identifying and deterring maladaptive practices.

b. Air Co-Pollutant Accounting, Social Safeguarding and Biodiversity Conservation.

Global Scenario

The widespread inclusion of these criteria across global taxonomies underscores their importance. These three DNSH criteria are interlinked, and excluding any one of them creates gaps and missed opportunities in aligning with India’s developmental goals.

Lessons for India

The DNSH principle should be strengthened by explicitly accounting for air co-pollutants, particularly particulate matter (PM2.5 and PM10), SO₂, and NOₓ, and their implications for local air quality. Integrating safeguards linked to local Air Quality Index standards would ensure that activities classified as climate-aligned do not worsen public health outcomes or environmental conditions. This broader environmental coverage would enhance investor confidence by signalling more comprehensive risk management and enable the taxonomy to contribute to additional Sustainable Development Goals, including health, sustainable cities, and environmental protection.

In parallel, DNSH assessments and technical screening criteria for adaptation and resilience should be reinforced through explicit social safeguarding requirements. DNSH must incorporate clearer treatment of local externalities, community-level impacts, and biodiversity risks. Embedding social safeguards within DNSH and adaptation screening would reduce the risk of maladaptation, improve classification robustness, and ensure that climate-supportive activities deliver net positive environmental and social outcomes.

Biodiversity protection is particularly essential as it gains global prominence. In India, biodiversity safeguards remain relatively weak. ASEAN and Singapore taxonomies highlight the interconnectedness of biodiversity and ecosystem health, emphasising the need for holistic involvement of these objectives in the taxonomy.

The Way Forward

India’s draft climate taxonomy represents a decisive first step in framing a national blueprint for climate-aligned finance. Yet, the real test is in translating the framework into measurable, authentic climate impact. Indeed, more can be done to bolster the achievement of each objective under the taxonomy. In the current draft, objectives are treated as necessary outcomes, while principles remain advisory. In an implementable taxonomy, this mismatch must be addressed. The instrumental role of the objectives should shape and reinforce the principles as guiding pathways.

To achieve these three core objectives, the paper offers 11 recommendations across six additional principles. Facilitating greater resource flows is a central objective and must be supported by improving the absorption and deployment of funds, alongside domestic interoperability. This requires ‘green tagging’ programmes that help identify financial paucity and sectoral standardisation of policy scopes. With international interoperability facilitating resource flows, domestic coherence can help with absorption.

The objective of preventing greenwashing remains underdeveloped, as the draft omits clear mechanisms for its mitigation. Enforceability is central in this regard. The paper recommends unified MRV and data regulation guides, establishment of interim thresholds, clarity in categorisation and the existence of exclusionary criteria, semi-mandatory taxonomy, and autonomous governance. The absence of enforceability mechanisms is compounded by the lack of permanence and additionality criteria, as well as the absence of sunset timelines for transition activities.

The objective of aligning with India’s development goals risks being undermined without a comprehensive set of ‘Do No Significant Harm’ (DNSH) criteria. These should function not only as safeguards against negative spillovers but also as subsidiary objectives. The interconnected and beneficial bi-directional relationship of pollution prevention, biodiversity conservation, social inclusion, and climate action makes them integral to India’s development pathway. Incorporating perspectives from indigenous communities and local representatives is critical to ensure that policies are grounded in on-the-ground realities.

Figure 4: Summary of New Principles and Recommendations

Source: Author’s own

In sum, the draft taxonomy lays a strong foundation, but its transformative potential depends on certain refinements, as discussed in this paper. In its current form, it does not fully capture the opportunities a national taxonomy offers to centralise and coordinate India’s climate finance landscape. Strengthening these principles is essential to ensure effective implementation and drive the intended outcomes.

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Diya Shah is Research Assistant, Centre for Economy and Growth, ORF.

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All views expressed in this publication are solely those of the author, and do not represent the Observer Research Foundation, either in its entirety or its officials and personnel.

Endnotes

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