In News:

In May 2025, the Ministry of Finance (Department of Economic Affairs) released India’s draft Climate Finance Taxonomy (CFT) for public consultation. This initiative is timely, as it coincides with India’s expanding climate finance ecosystem, including green bonds, carbon credit trading, and global commitments under the Paris Agreement and net-zero targets by 2070.

What is a Climate Finance Taxonomy?

• A classification framework that defines which sectors, technologies, and activities qualify as climate-aligned investments.
• It is described as a “living document”, evolving with India’s domestic priorities and international climate obligations.
• Core purpose: To mobilise public and private finance, ensure transparency, and prevent greenwashing.

Key Features of India’s Draft CFT

• Scope: Covers activities contributing to mitigation, adaptation, and low-carbon transition.
• Review Mechanism
  • Annual reviews for course correction.
  • Five-year reviews aligned with India’s Nationally Determined Contributions (NDCs) and the UNFCCC global stocktake.
• Legal Coherence
  • Designed to be consistent with Indian laws (Energy Conservation Act, SEBI regulations, Carbon Credit Trading Scheme).
  • Harmonised with international standards for credibility.
• Substantive Clarity: Provides clear, precise, and updated definitions that are accessible to both experts and non-experts.
• Inclusivity
  • Simplified compliance for MSMEs, informal sector actors, and vulnerable communities.
  • Staggered timelines for smaller entities to avoid exclusion.
• Institutional Accountability
  • Proposal for a standing review unit/expert committee.
  • Public dashboards to ensure transparency and investor confidence.

Significance

• Boosts Investor Confidence: Provides clarity for domestic and global investors in India’s green economy.
• Ensures Transparency: Prevents mislabeling of projects as “green,” tackling greenwashing risks.
• Mobilises Finance: Unlocks predictable, science-based finance flows for mitigation and adaptation.
• Supports Net-Zero Goals: Complements instruments like green bonds and carbon credit markets.
• Global Positioning: Strengthens India’s role in shaping international norms on climate finance.