Lack of green finance taxonomy hobbles India's net-zero ambitions

“A formal definition of green finance along with a taxonomy is the need of the hour as it would enable more precise tracking of finance flows to green sectors, which in turn, would help design effective policy, regulations and institutional mechanisms directed towards increasing both public and private investments,” said M Rajeshwar Rao, former deputy governor of the Reserve Bank of India (RBI), at the Business Standard BFSI Insight Summit in Mumbai in December 2022.

Four years on, the wait continues.

“A key challenge is a fragmented regulatory landscape. Regulators are operating through disparate rules and supervisory expectations rather than a cohesive policy framework. The most glaring gap is the absence of a finalised, statutory national green taxonomy,” said Rajesh Narain Gupta, founder and chairman, SNG & Partners, Advocates & Solicitors. “This absence of an anchor taxonomy forces issuers to seek bespoke legal opinions on eligibility for every green issue. It also creates a gap in documentation, as definitions linked to an official taxonomy are missing.”

A NITI Aayog estimate puts the investment required for net-zero transition at $22.7 trillion by 2070 and a financing shortfall of $6.5 trillion. Net-zero demand by 2050 alone will exceed $8 trillion, a gap of nearly $2.5 trillion. As for the taxonomy, the hope is that it may be in place by the end of FY27. Finance Minister Nirmala Sitharaman said in the Union Budget FY25, “We will develop a taxonomy for climate finance for enhancing the availability of capital for climate adaptation and mitigation. This will support the achievement of the country’s climate commitments and green transition.”

The Report on Trend and Progress of Banking in India 2024-25 said the RBI is following a building-block approach, focusing on the development of specific capacities and technical expertise in regulated entities (REs). It has held extensive stakeholder discussions and capacity-building initiatives, which also included sensitising the board members and top management of the REs. It is hoped that the Reserve Bank Climate Risk Information System will be operationalised soon.

But in the here and now, pain may be around the corner; it could affect small and medium enterprises in the export ecosystem.

The European Union (EU) is undertaking a transformation of its import regulatory framework.

Historically, access to the EU market depended primarily upon tariffs, customs procedures, technical regulations, product standards, and safety requirements. Increasingly, however, access to the EU market is being conditioned upon compliance with environmental, climate, sustainability, labour, human rights, and supply-chain governance requirements. These measures form part of broader EU initiatives including the European Green Deal, Circular Economy Action Plan, Sustainable Products Initiative, and Supply Chain Due Diligence Framework. “The period between 2026 and 2030 is likely to be critical. Businesses that invest early in sustainability reporting, carbon accounting, digital traceability, supply-chain governance, and compliance infrastructure are likely to maintain and potentially expand access to EU markets. Businesses that do not adapt may face increasing barriers to participation in European value chains,” added Gupta.

Now, how do you go about green financing in the absence of a formal taxonomy — both on the liabilities and assets sides?

“While the absence of a taxonomy does create some fragmentation, it has also accelerated early alignment with global practices. In India, green financing is evolving as a principles-led exercise, anchored in international standards but adapted through internal frameworks and local nuances,” said Sankar Chakraborti, founder of Risk Insights (and former managing director and chief executive officer, Acuité Ratings & Research).

On the liabilities side, issuers are aligning with globally accepted norms such as the ICMA Green Bond Principles and multilateral frameworks. On the assets side, financial institutions are developing internal taxonomies that map exposures to established green sectors — renewables, energy efficiency, clean mobility — while applying a ‘do no significant harm’ and transition-alignment lens. “From a rating perspective, the assessment spans both sides of the balance sheet—evaluating the credibility of use-of-proceeds frameworks, governance standards, and disclosures, alongside the quality of underlying assets and their measurable environmental outcomes.”

Incidentally, the Hong Kong-based Asia Securities Industry & Financial Markets Association in its first “Green Taxonomy Survey” in December 2022 reported that 75 per cent of the respondents had started using a taxonomy with the “EU Taxonomy of Sustainable Activities” being the dominant one.

That said, according to Ajay Menon, senior practice lead for entrepreneurship at TechnoServe, the firm hasn’t encountered any issues with the taxonomy, “because it seems pretty straightforward for us. We have a deal pipeline. We identify companies that are investable, and then we match-make them with investors. Then, we do roadshows with those investors, either in person or virtually, with a mix of impact investors. The companies pitch to them, and they raise equity or debt. These are impact investors who come in with patient capital”. As for end-use monitoring (to ensure a client is deploying it for the purpose stated at the time of raising funds), “They do very deep due diligence on you as a company, your team, the sector you operate in, your finances. And we help companies get ready for fundraising. We take them through coaching sessions”.

At a time when climate adaptation and mitigation of risks should be at the forefront of the financial system, we find little outreach from policymakers to sensitise the system to climate risks. “Environment” is considered an elite goal for the future, but the impact in recent years of heat and extreme weather events on the financial lives of low-income households in India has already been well documented,” Sumita Kale, CEO and senior fellow, Indicus Foundation. As she views it, women at the bottom of the pyramid (in both urban and rural areas) suffer disproportionately. “They not only work in the heat outdoors — they often cook in badly ventilated spaces with tin roofs that heat up more. They are more susceptible to heat-induced illnesses, particularly during pregnancy and menstruation”. Medical costs increase, while wage income drops with illness. Yet, support to provide resilience through parametric insurance, or funds for cool roofs, for instance, is missing. “In the absence of clear policy frameworks, there is no incentive for financial service providers to offer solutions that will prevent weather shocks from exacerbating financial stress among India’s most vulnerable households, especially women.”

In recent years, the build-up on green finance has been rapid.

In November 2022, Sitharaman finalised the Sovereign Green Bonds framework. Earlier in July 2022, the RBI had come out with its “Survey on Climate Risk and Sustainable Finance”, which was followed a month later by the Securities and Exchange Board of India’s reporting architecture on sustainable finance.

A taxonomy will round off initiatives well.