India's Draft Climate Finance Taxonomy: What It Would Classify

Why a taxonomy matters

A taxonomy answers one question: which economic activities count as climate-aligned?

That sounds academic until you notice how much rests on it.

Labelled debt depends on it. A green bond promises that proceeds fund environmentally beneficial projects. Without an authoritative definition, the issuer, the reviewer and the investor may each apply a different one.

ESG funds depend on it. A fund claiming to invest sustainably needs a defensible basis for what qualifies.

Concessional finance and policy support depend on it. If the state wants to direct capital toward the transition, it must be able to say what the transition consists of.

Greenwashing enforcement depends on it. It is difficult to prove a claim is misleading if there is no agreed benchmark for what the claim should mean.

India currently operates without this foundation. SEBI's frameworks define eligible categories for labelled debt, and the ESG fund rules define permitted strategies, but there is no single authoritative classification across the financial system. The taxonomy is intended to supply it.

The structure of the draft

Two families of activity

The draft framework classifies activity into two families, and the distinction between them is the framework's central idea.

Climate-supportive activities. Activities that reduce emissions, deploy adaptation solutions, or contribute to climate goals through research and innovation. These are subdivided into two tiers:

• Tier 1: broader than "direct avoidance" alone. Per Table 1 of the draft it covers absolute emission avoidance including non-fossil sources; reduction in emission intensity beyond a defined factor, with pathways for further improvement, that also contribute to adaptation and resilience; and all activities that enhance climate resilience.
• Tier 2: activities that lower emissions intensity and have a clear pathway to further improvement.

Transition-supportive activities. Activities that improve energy efficiency or reduce emissions intensity in sectors where full decarbonisation is not currently feasible. This is the category that accommodates heavy industry.

The tiering within climate-supportive activity is a more careful design than a binary green-or-not classification. It recognises that a solar installation and an efficiency improvement in an existing plant both contribute, but not identically, and that an investor may reasonably want to distinguish them.

Two phases of development

The taxonomy is being built in stages.

Phase one establishes the foundational framework: the principles, the definitions, the classification logic.

Phase two applies that framework to classify specific activities, measures and projects.

The May 2025 draft is the first phase. That is why it reads as an architecture rather than a list, and it is why a company cannot yet look up whether its particular activity qualifies. The document that would answer that question has not been produced.

Sectors in the first phase

Power, mobility and buildings are addressed for both mitigation and adaptation co-benefits, reflecting their combined significance for emissions reduction and resilience.

Agriculture, food and water security are addressed in the context of climate adaptation and resilience building. This limb is frequently omitted from summaries of the draft, including earlier material in this hub, and the draft devotes substantive sections to it.

Hard-to-abate sectors, principally iron and steel and cement, are addressed through the transition-supportive route rather than being excluded.

Why steel and cement are included

This is the most contested feature of the draft, and the most important to understand, because it reveals what kind of taxonomy India is building.

The European Union's taxonomy is built around technical screening criteria that an activity must meet to qualify as environmentally sustainable. The effect is largely binary: an activity is aligned or it is not, and heavy industry frequently is not.

India's draft takes a different view, and the reasoning runs as follows.

A developing economy cannot decarbonise industry it has not yet built. India's steel and cement consumption per head remains far below that of developed economies, and both will grow as infrastructure and housing expand. A taxonomy that classifies all steel production as unaligned tells an Indian steelmaker that no amount of improvement will attract climate finance, which removes the incentive to improve at all.

The transition-supportive category is the answer: activity that reduces emissions intensity in a sector that cannot yet be fully decarbonised is recognised as contributing, without pretending it is equivalent to renewable generation.

The objection is equally serious and should be stated. A transition category is the natural home for greenwashing. An incremental efficiency improvement in a coal-based process can be presented as climate-aligned. Without strict criteria and credible pathways, "transition" becomes a label that admits almost anything.

Which of these is right depends entirely on how tightly phase two draws the criteria, which is precisely the work that has not yet been published. That is why the delay matters more than it appears.

Where it fits with the rest of India's architecture

The taxonomy is designed to connect to instruments that already exist rather than to sit alongside them.

• Instrument: Energy Conservation Act and the carbon market; Connection: Emissions intensity concepts and covered sectors align with the CCTS approach
• Instrument: SEBI labelled debt frameworks; Connection: The taxonomy would supply the definitional basis that eligible categories currently approximate
• Instrument: ESG fund rules; Connection: A classification against which fund claims could be tested
• Instrument: International standards; Connection: Alignment intended, to keep Indian instruments legible to foreign investors

There is a coverage question worth flagging. Commentary on the draft has noted that its scope and SEBI's existing frameworks do not map perfectly. SEBI's green debt categories extend to matters such as pollution prevention, biodiversity conservation, waste management and sustainable land use, while the taxonomy's first phase concentrates on the sectors above and brings in hard-to-abate industry that SEBI's frameworks do not address in the same way. Reconciling the two will be part of finalisation.

What the delay actually costs

The draft is more than a year old and consultation closed in June 2025. The framework had not been notified as at mid-2026.

Four consequences follow.

Labelled debt lacks a domestic definitional anchor. Indian issuers rely on SEBI's eligible categories and on international standards such as the ICMA principles. That works, but it means "green" in the Indian market is defined substantially by reference to foreign frameworks.

Transition finance has no rulebook. The sectors that most need transition capital, steel and cement above all, are precisely the ones the taxonomy would address, and they are waiting.

Greenwashing enforcement stays harder. Without an authoritative classification, a claim that an activity is climate-aligned is difficult to test.

Comparability with foreign capital is weaker. International investors assessing Indian climate-labelled instruments have no domestic taxonomy to read them against.

None of this is catastrophic. India's labelled debt market functions without it. But the taxonomy is the piece that would convert a set of workable arrangements into a coherent system, which is why its finalisation is among the developments most worth tracking.

What a company should do now

Do not wait for it to plan. The taxonomy will classify activity; it will not change what reduces emissions. Investment decisions that make sense on transition grounds will very likely qualify.

Track it if you are in a hard-to-abate sector. Steel, cement and similar producers have the most at stake, because the transition-supportive criteria will determine whether their improvement projects can attract climate-labelled finance.

If you issue labelled debt, watch for reconciliation. Where the taxonomy and SEBI's eligible categories diverge, the position will need to be resolved, and existing frameworks may need revisiting.

Treat "transition-aligned" carefully in the meantime. Until criteria are published, describing an activity as transition-aligned is an assertion rather than a classification, and the greenwashing regime that applies to consumer-facing environmental claims does not pause for a pending taxonomy.

Frequently asked questions

Does India have a climate finance taxonomy? Not a final one. The Department of Economic Affairs published a draft framework in May 2025, consultation closed on 25 June 2025, and it had not been formally notified as at mid-2026.

Who published it? The Department of Economic Affairs, Ministry of Finance.

What categories does the draft use? Two families. Climate-supportive activities, subdivided into Tier 1, covering absolute emission avoidance, intensity reduction beyond a defined factor with pathways for further improvement, and activities enhancing climate resilience; and Tier 2, covering intensity reduction with defined pathways, energy efficiency where absolute avoidance is not currently viable for want of alternative technology, and adaptation activities that may leave unmitigated emissions. Tier 1 is therefore not confined to direct avoidance, and adaptation sits in both tiers. This corrects an earlier improvement pathway. And transition-supportive activities, for sectors where full decarbonisation is not currently feasible.

Which sectors does the first phase cover? Three limbs in the first phase: power, mobility and buildings for mitigation and adaptation co-benefits; agriculture, food and water security for adaptation and resilience; and hard-to-abate sectors including iron and steel and cement addressed through the transition-supportive route.

Why does the taxonomy include steel and cement? Because a developing economy's industrial output will grow, and a classification that treats all such production as unaligned removes any incentive to reduce emissions intensity. The transition-supportive category recognises intensity improvement without equating it to renewable generation.

What is the criticism of including them? That a transition category is where greenwashing naturally accumulates. Without strict criteria and credible pathways, incremental improvement in a high-emitting process can be presented as climate-aligned.

How is the taxonomy being developed? In two phases. The first establishes the foundational framework of principles and classification logic. The second classifies specific activities, measures and projects. The May 2025 draft is phase one.

Can I check whether my activity qualifies? Not yet. The classification of specific activities is phase two work and has not been published.

How much finance is it intended to support? The US$250 billion a year figure that is usually quoted here is not an ambition of the taxonomy. The draft cites it from NITI Aayog's India Energy Security Scenarios 2047, as the estimated investment required for the energy transition each year until 2047. The taxonomy is a classification framework and sets no mobilisation target of its own.

How does it differ from the EU taxonomy? The European approach applies technical screening criteria producing a largely binary alignment test that heavy industry frequently fails. India's draft creates an explicit transition-supportive route for sectors that cannot yet fully decarbonise.

What happens to labelled debt in the meantime? Indian issuers continue to rely on SEBI's eligible categories and on international standards such as the ICMA principles, which means "green" in the Indian market is currently defined substantially by reference to foreign frameworks.