INDIA’S CLIMATE FINANCE TAXONOMY

INDIA’S CLIMATE FINANCE TAXONOMY

Relevancy & Challenges

PRABJOT SINGH BHULLAR1

Abstract
This paper seeks to identify the (a) Relevancy of a Climate Finance Taxonomy in the backdrop of
international initiatives – the Paris Agreement, the Sustainable Development Goals and the Nationally
Determined Contributions, (b) Challenges in store at COP 29, linked with the NCQG, which will decide
the quantum of climate finance available in the years ahead, (c) Principles and trends adopted in
global taxonomies, and (d) Preferred approach to accomplish India’s pending Climate Finance agenda
i.e. Drafting the Climate Finance Taxonomy

I. CLIMATE FINANCE

The United Nations Framework Convention on Climate Change (UNFCC) defines “Climate
finance” as “local, national or transnational financing, drawn from public, private and alternative
sources of financing that seeks to support mitigation and adaptation actions that will address
climate change”.

Climate finance plays a critical role in addressing climate change by supporting actions
that reduce or avoid greenhouse gas emissions, improve resilience to climate impacts and foster
sustainable development. Climate finance is needed to significantly reduce emissions and adapt
to adverse effects and impacts of a changing climate.

India needs substantial amount of climate finance by 2050 to achieve its ambitious
sustainability targets. As per estimates: -

 The aggregate investment support required by India to achieve its 2070 net-zero target is
close to USD 1.4 trillion, which equates to an average annual value of USD 28 billion over the
next 50 years2.
 India requires annual clean energy investments in the range of $253- $263 billion (rising to
$325-$355 billion over 2031-2035) from 2026-2030, to align with sustainable development
and climate goals. but current investments available for climate action in India is only $44
billion per year, as per Climate Policy Initiative report.3
 India is aiming to install 500 GW of generating capacity from non-fossil-fuel sources by 2030,
five million metric tonnes per annum of green hydrogen (GH2) production capacity and
differentiated levels of penetration for various Electric Vehicle (EV) categories. Achieving 450
GW of renewable energy by 2030 will require an additional ₹16.8 lakh crore investment.

1
 INDIA’S CLIMATE FINANCE TAXONOMY

India’s target under the National Green Hydrogen Mission, will need ₹8 lakh crore. The
consumers will need to spend around ₹16 lakh crore to purchase EVs to achieve the. A long-
term perspective reveals a greater requirement: ₹850 lakh crore in investments between
2020 and 2070 to achieve net-zero emissions. 4

While Climate finance has gained momentum but funds available from conventional
sources in India i.e. government budgets, domestic banks, and financial institutions are
inadequate for a low-carbon transition and for achieving India’s climate goals and targets. There
is a definite need to mobilize global private investments to bridge the gap between the amount
that can be made available from conventional sources in India as against the total investment
required to achieve the target of “net-zero” by 2070.

II. PARIS AGREEMENT AND NATIONALLY DETERMINED CONTRIBUTION

The Paris Agreement was adopted at the United Nations Framework Convention on
Climate Change (COP 21) in Paris, France, on 12 December 2015 and it entered into force on 4
November 2016. The Paris Agreement was arrived at based on the principle of “common but
differentiated responsibilities and respective capabilities” (CBDR-RC). The understanding puts the
onus on historical polluters (the developed countries) to contribute to climate finance and help
developing countries in their mitigation and adaptation measures

The signatories agreed to non-binding targets to curb the increase in global average
temperature caused by anthropogenic greenhouse gas emissions to below 2 degrees Celsius by
adopting Nationally Determined Contribution (NDC). The NDCs are the signatory nation’s
voluntary commitment to take actions to achieve goals to mitigate greenhouse gas emissions and
adapt to climate change.

Every signatory nation was required to submit theoretically ambitious targets every five
years. India had submitted its NDCs to the UNFCC on 2nd October,2015 in accordance with COP
21, comprising, inter-alia, of following two quantifiable targets:

 To reduce the emissions intensity of its GDP by 33 to 35 percent by 2030 from 2005 level;
and

 To achieve about 40 percent cumulative electric power installed capacity from non-fossil
fuel-based energy resources by 2030.

At the Conference of Parties held in Glasgow in 2021 (COP 26), India adopted the
“PANCHAMRIT”, to deal with the climate change challenges, which included the following:

 India will reach its non-fossil energy capacity to 500 GW by 2030.

2
 INDIA’S CLIMATE FINANCE TAXONOMY

 India will meet 50 percent of its energy requirements from renewable energy by 2030.
 India will reduce the total projected carbon emissions by one billion tonnes from now
onwards till 2030.
 By 2030, India will reduce the carbon intensity of its economy by less than 45 percent.
 By the year 2070, India will achieve the target of Net Zero.

As the two quantifiable targets under COP 21 were achieved ahead of the time 5, India
updated its NDC in August 2022. The updated NDCs are set out below: -

 To put forward and further propagate a healthy and sustainable way of living based on
traditions and values of conservation and moderation, including through a mass
movement for ‘LIFE’– ‘Lifestyle for Environment’ as a key to combating climate change
[ UPDATED].
 To adopt a climate friendly and a cleaner path than the one followed hitherto by others
at corresponding level of economic development.
 To reduce Emissions Intensity of its GDP by 45 percent by 2030, from 2005 level
[UPDATED].
 To achieve about 50 percent cumulative electric power installed capacity from non-
fossil fuel-based energy resources by 2030, with the help of transfer of technology and
low-cost international finance including from Green Climate Fund (GCF) [UPDATED].
 To create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through
additional forest and tree cover by 2030.
 To better adapt to climate change by enhancing investments in development
programmes in sectors vulnerable to climate change, particularly agriculture, water
resources, Himalayan region, coastal regions, health and disaster management.
 To mobilize domestic and new & additional funds from developed countries to
implement the above mitigation and adaptation actions in view of the resource required
and the resource gap.
 To build capacities, create domestic framework and international architecture for quick
diffusion of cutting-edge climate technology in India and for joint collaborative R&D for
such.

III. SUSTAINABLE DEVELOPMENT GOALS

The 2030 Agenda for Sustainable Development was adopted by 193 Member States at the UN
General Assembly Summit in September 2015, and it came into effect on 1 January 2016. The
global agenda is based on the principle of universality: “Leave No One Behind” and thus

3
 INDIA’S CLIMATE FINANCE TAXONOMY

development is looked upon in all its dimensions and includes all people, everywhere and is to be
achieved through the participation of all, especially the most vulnerable and marginalised.

The global agenda adopted 17 Sustainable Development Goals (“SDGs”):

 SDG1: No poverty
 SDG2: Zero hunger
 SDG3: Good health and well-being
 SDG4: Quality education
 SDG5: Gender equality
 SDG6: Clean water and sanitation
 SDG7: Affordable and clean energy
 SDG8: Decent work and economic growth
 SDG9: Industry, innovation and infrastructure
 SDG10: Reduced inequalities
 SDG11: Sustainable cities and communities
 SDG12: Responsible consumption and production
 SDG13: Climate action
 SDG14: Life below water
 SDG15: Life on land
 SDG16: Peace, justice, and strong institutions
 SDG17: Partnerships for the goals.

IV. COP 29, BAKU, AZERBAIJAN AND NCQG

The 29th Conference of the Parties (COP 29) of the UNFCC is proposed to be held in Baku,
Azerbaijan in November 2024.

Amongst other goals, arriving at consensus on the “New Collective Quantified Goal”
(NCQG) for climate finance is a top agenda at Baku. In terms of the understanding arrived at by
the Parties at COP 21, , the Conference of the Parties have to set out a new NCQG, prior to 2025.

The revised NCQG target is to be built on the floor of $100 billion a year, which was arrived
at COP 15 in 2009. In effect, the parties need to arrive at consensus on the revised financial target
for developing countries, post 2025.

India has made a submission to the UN Climate body that the developed countries
provide at least $1 trillion per year in climate finance to developing countries from 2025 to take
actions required to face the challenges of global warming. 6

4
 INDIA’S CLIMATE FINANCE TAXONOMY

It is a matter of concern for most developing countries, who are already under huge debt
burdens that they cannot be expected to increase their burden with a view to achieve climate
change goals. Accordingly, the form and terms on which financing becomes available to the
developing countries is critical if the nations have to “collectively” and “collaboratively” achieve
their climate goals. The developing countries ideally, need a “grant-based” financing or
alternatively, financing at concessional rates to achieve their climate related goals.

The parties are yet to agree on the revised NCQG, its structure, quantum and the sources
of finance. Some Parties have represented for “grant based” funding or financing at highly
concessional rates. A final decision is expected to be taken in Baku on the re-set NCQG and its
timeline.

As per press reports, COP29 faces an uphill battle and there are concerns that there could
be a breakdown of talks, if developed nations do not step up to take on their climate finance
responsibilities.7

V. CLIMATE FINANCE TAXONOMY: RELEVANCY

The Minister of Finance, Government of India has in the Budget speech for 2024-25, on
23rd July 2024, undertaken to develop a taxonomy for climate finance. Para 104 of the Budget
Speech provides as under: -

“We will develop a taxonomy for climate finance for enhancing the availability of
capital for climate adaptation and mitigation. This will support achievement of the
country’s climate commitments and green transition.”

The lack of a clear climate finance taxonomy has been one of the hurdles for global
sustainable finance to reach India.

The adoption of a climate finance taxonomy would provide stakeholders clarity on

economic activities, which are aligned with India’s climate adaptation and mitigation
commitment and is expected to provide an impetus to flow of global climate funds from
international sources into activities which are recognised as “sustainable”

Taxonomies establish clear definitions and criteria that aid stakeholders, be it investors,
policymakers, and businesses in identifying entities and/or economic activities that align with
the climate goals. They not only help in allocating resources efficiently but also enhance
transparency in the flow of climate finance towards identified economic activities, which meet
the eligibility criteria.

5
 INDIA’S CLIMATE FINANCE TAXONOMY

The Climate Finance taxonomy is expected to provide a structured framework which shall
categorize economic activities based on their impact on India’s commitment to climate adaptation
and mitigation. As global initiatives are striving to mobilize financial resources towards
sustainable development, the need for a common global understanding on what constitutes
environmentally sustainable activities is paramount.

VI. GLOBAL APPROACHES

Countries have adopted taxonomies, which have provided guidance to stakeholders on

activities, which meet the sustainability criteria and contribute to climate, environmental and
social goals. The taxonomies have focussed on addressing climate change mitigation and
adaptation and/or social and environmental themes like sustainable use and protection of natural
resources, pollution prevention and control, biodiversity and ecosystem protection. The
approach to drafting the taxonomies has included laying down the principles and goals, climate
and environmental objectives, identifying economic activities and laying down metrics and
criteria for identified activities.

The G20 Sustainable Finance Roadmap. 2021 had laid out six voluntary principles 8,
which has inspired global taxonomies: -

 Ensure material positive contributions to sustainability goals and focus on outcomes.

 Avoid negative contribution to other sustainability goals (e.g., through “do no significant harm”
to any sustainability goal requirements);
 Be dynamic in adjustments reflecting changes in policies, technologies, and state of the
transition.
 Reflect good governance and transparency
 Be science-based for environmental goals and science- or evidence-based for other
sustainability issues
 Address transition considerations

The European Union (EU) approach to the taxonomy has influenced several regional and
national taxonomies across the globe. The structured approach adopted has provided clarity to
stakeholders regarding activities, which support EU's climate and environmental goals and
facilitated informed decision-making in the context of climate finance. At the core of EU
Taxonomy are six environmental objectives: -

 Climate change mitigation

 Climate change adaptation
 Sustainable use and protection of water and marine resources
 Transition to a circular economy

6
 INDIA’S CLIMATE FINANCE TAXONOMY

 Pollution prevention and control,

 Protection and restoration of biodiversity and ecosystems.

The EU Taxonomy has provided for principles for identifying “economic activities” which
support EU's climate and environmental goals: -

 Makes a “substantial contribution” to one of the six environmental objectives.

 Meets the technical criteria for meeting the environmental objectives
 Does not cause significant harm to any of the other environmental objectives (“Do No
Significant Harm” (DNSH) principle).
 Meets social safeguards including human rights, workers’ rights, anti- bribery/corruption,
taxation, and fair competition and complies with EU regulations and directives

The approach adopted by the Latin American countries under a common framework (LAC
Taxonomy Common Framework)9 for identifying activities which take forward the climate change
mitigation and climate change adaptation goals. The taxonomy has provided rules for inclusion

1. INTRODUCTION
of economic activities under respective sectors in a taxonomy:

 Activities that substantially contribute towards the taxonomy objectives

 Activities that enable other activities in the same or other sectors to meet the taxonomy

2. COMMON FRAMEWORK4. REFERENCES

objectives
 Activities that need to undergo transition to eventually meet the taxonomy ambition over a
defined time period
 Activities that do not have a significant contribution but have a low or minimum contribution
to the taxonomy objectives and do not cause harm

The LAC Taxonomy Common Framework has also provided for guidelines for choosing
metrics to establish thresholds for certain sectors and activities of the taxonomy and guidance on
DNSH for other environmental objectives and considerations for adaptation for the sectors.

In addition to the taxonomy adopted in EU and Latin America, the approach adopted in
taxonomies adopted in other jurisdictions can also be reviewed: -
 ASEAN  Kazakhstan
 Bangladesh  Malaysia
 Brazil  Mexico
 China  Mongolia
 Columbia  South Africa
 Georgia  Sri Lanka
 Indonesia  Thailand

Most global taxonomies have promoted activities that contribute to specific environmental
and/or social objectives and have required that the activity should make a substantial

7
 INDIA’S CLIMATE FINANCE TAXONOMY

contribution to at least one of the identified objectives and at the same time not cause any
significant harm to any of the other objectives. While identifying the economic activities, the test
adopted has been whether it qualifies as “sustainable” and contributes to environmental and/or
social objectives. To ascertain, the activities meet prescribed standards, a technical criterion is
used.

A report issued by Global Financial Markets Association (GFMA) 10 (which represents the
common interests of the world’s leading financial and capital market participants) had focussed on
Climate Finance primarily and did not extend to environmental, social, and governance (ESG)
issues. The GFMA report identified principles which should form the basis for developing a
Climate Finance taxonomy:

 Climate Finance taxonomies should be broadened beyond using use of proceeds to

capture entity-level activities and all eligible sources of capital.
 Climate Finance taxonomies should be objective in nature, supported by clearly defined
metrics and thresholds aligned to the Paris Agreement, and science-based targets.
 Climate Finance taxonomies should have a consistent set of principles and definitions
but provide flexibility for regional and temporal variation to align with differences in
transition pathways.
 Climate Finance metrics should be defined and applied to sectors using science-based
targets, balancing ease of use with transparency and robustness to both assess climate
impact and support third-party verification.
 Climate Finance taxonomies should be based on a governance process that is robust,
inclusive, and transparent, and has the flexibility for continued evolution.

VII. DRAFTING INDIA’S CLIMATE FINANCE TAXONOMY

The adoption of climate finance taxonomy can foster collaboration among countries and
financial institutions and by aligning with common definitions and criteria, nations can better
coordinate their climate finance initiatives and ensure that investments are supportive of global
climate goals. This alignment not only enhances investor confidence but also increases the
effectiveness of climate finance in addressing urgent environmental challenges.

While the Climate Finance Taxonomy needs to be adapted to facilitate achievement of

India’s climate change and sustainability goals, ensuring harmony and interoperability with
existing taxonomies would eliminate barriers for flow of capital from international investors in
identified activities, assets and projects in India.

8
 INDIA’S CLIMATE FINANCE TAXONOMY

The preferred approach for framing India’s Climate Finance Taxonomy could include the
following: -

2. Governance Structure
 Establish a Steering Committee of members which plans and oversees the development
process.
 Identify advisors and sectoral experts who can contribute to the drafting of the climate
finance taxonomy.
3. Stakeholders
 Identify stakeholders who need to provide inputs in the process of formulating the
taxonomy
 Demarcate the role to be played by each stakeholder in organising and conducting
technical and industry discussions
 Key stakeholders could include: -
i. Ministry of Finance, Ministry of Environment, Ministry of Corporate Affairs and
other ministries and departments or entities expected to play a key role in India’s
initiatives for climate change mitigation and adaptation.
ii. Regulators – banking, insurance and securities markets – RBI, IREDA and SEBI
iii. Banks and financial institutions supporting sustainable investment including
multi-lateral banks and funding institutions.
iv. Investors supporting climate financing and development
v. Any other stakeholders deemed relevant by the Steering Committee

4. Literature Review and Gap analysis

 Take stock of existing efforts in India, including initiatives, incentives, and mechanisms to
promote climate finance goals and objectives

 Conduct a gap analysis with a view to list out pending action items at the national and
regional level based on a comparison with existing precedents in other jurisdictions

 Conduct a review of existing taxonomies adopted in other jurisdictions and draw down
from approach adopted to achieve objectives

5. Scope, Goals and objectives

 Establish the climate/sustainability, environmental or social principles, goals and
objectives of the taxonomy based on national, regional and international commitments of
India

9
 INDIA’S CLIMATE FINANCE TAXONOMY

 Ensure that Taxonomy is aligned with India’s commitments under international

agreements, the NDCs and SDGs
 Conduct a sector prioritisation exercise to ascertain which sectors and activities need to be
prioritized under the taxonomy

6. Develop Metrics and Thresholds

 Identify reporting frameworks to be adopted by stakeholders for activities to be eligible
under the taxonomy.
 Set out the relevancy of compliance with existing frameworks by regulators in India.
 Set out the relevancy of reporting under any international reporting standards.
 Harmonize the criteria to be adopted under the taxonomy and provide clarity to the list of
eligible assets with thresholds and metrics
 Create “multi-sectoral committees” to assess and certify identified activities, assets and
projects in India, and provide for metrics and thresholds
7. Initial Draft
 Based on the gap analysis, prepare an initial draft of the taxonomy.
 The draft should include the list of activities and their screening criteria, at least for the
priority sectors and activities
8. Technical discussions
 The first draft of the taxonomy document should be shared with key stakeholders for inputs
and feedback
 This document should also be subjected to technical discussions with sectoral and national
experts, who provide feedback and develop screening criteria for all the activities.
 Sector leads should filter out non-relevant comments (e.g., unscientific arguments for
thresholds) and integrate the changes.
9. Revised draft of the taxonomy
 After technical discussions, the relevant comments and inputs should be factored in the
draft of the taxonomy.
10. Public consultations
 The taxonomy document should be subjected to a public consultation process in a defined
timeframe to receive feedback and comments from a wider stakeholder group. This will
ensure that comments and feedback from all relevant stakeholders will be considered
before the documents are published for use.
 Publish a FAQ or a guidance document for users which explains the taxonomy design, key
elements and the rationale behind the components and definitions in the document.
 Set a time limit for the public consultation process

10
 INDIA’S CLIMATE FINANCE TAXONOMY

11. Final review and publishing

 The comments received during the public consultation process should be reviewed and
integrated into the revised draft of the taxonomy.
12. Implementation
 After the taxonomy is finalized, steps must be taken to ensure its adequate implementation
Develop regulations, guidance, circulars, and policies to provide clarity to stakeholders on
the taxonomy
 Conduct capacity building programs for key stakeholders e.g., banks, insurance companies,
pension funds, companies, etc.
13. Updates
 Based on feedback received from stakeholders, the taxonomy should be reviewed and
updated periodically.

REFERENCES

1 © Prabjot Singh Bhullar, Advocate, [email protected]; 21 October 2024

Prabjot is an independent legal practitioner, based at Gurgaon, India. Prabjot is certified as an
Environment, Social and Governance (ESG) Expert and Business Responsibility and
Sustainability Reporting (BRSR) Expert by Directors Institute, World Council of Directors.
Prabjot is trained and well versed with issues relevant for Sustainable Finance Taxonomies and
Climate Change. Prabjot started his legal practice in 1992 and has been a Partner with leading
law firms in India in the past. Prabjot has advised developers, investors, lenders, policy makers
and regulators on projects, transactions and assignments across sectors in India and other
jurisdictions

2 Vaibhav Pratap Singh, Gagan Sidhu. “Investment Sizing India’s 2070 Net-Zero Target.” Issue
Brief, Oct. 2021, www.ceew.in/cef/solutions-factory/publications/CEEW-CEF-Investment-
Sizing-India%E2%80%99s-2070-Net-Zero-Target.pdf.
3 SV Krishna Chaitanya, and SV Krishna Chaitanya. “COP29: What Should Be India’s Strategy on

Climate Finance?” The New Indian Express, 13 Oct. 2024,

www.newindianexpress.com/xplore/2024/Oct/13/cop29-what-should-be-indias-strategy-on-
climate-finance.
4 “On Climate Finance to Developing Nations | Explained.” The Hindu, 21 Oct. 2024,

www.thehindu.com/sci-tech/energy-and-environment/on-climate-finance-to-developing-
nations-explained/article68776888.ece.
5 https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1987752]

6---. “India Calls for $1 Trillion per Year Climate Finance From Next Year, Submits Its Proposal
to the UNFCCC.” The Times of India, 6 Mar. 2024, timesofindia.indiatimes.com/india/india-calls-
for-1-trillion-per-year-climate-finance-from-next-year-submits-its-proposal-to-the-
unfccc/articleshow/108276300.cms.

11
 INDIA’S CLIMATE FINANCE TAXONOMY

7Nandi, Jayashree. “Climate Finance Talks Are Far From a Consensus, Shows UN Doc.” Hindustan
Times, 17 Oct. 2024, www.hindustantimes.com/india-news/climate-finance-talks-are-far-from-
a-consensus-shows-un-doc-101729156987680.html.
8 G20. Sustainable Finance Roadmap. 2021, g20sfwg.org/wp-
content/uploads/2022/01/RoadMap_Final14_12.pdf.
9 Working Group on Sustainable Finance Taxonomies in Latin America and the Caribbean, et al.

Common Framework Of Sustainable Finance Taxonomies For Latin America And The Caribbean.
report, 2023, www.unepfi.org/wordpress/wp-content/uploads/2023/07/Common-
Framework-of-Sustainable-Finance-Taxonomies-LAC_-ENG-Executive-
Summary.pdf#:~:text=What%20is%20the%20Common%20Framework%20of%20Sustainable
%20Finance,of%20or%20intend%20to%20develop%20sustainable%20finance%20taxonomie
s.
10 “Global Principles for a Climate Finance Taxonomy.” Organization for Economic Co-operation
and Development, p. 6. www.gfma.org/wp-content/uploads/2021/06/global-principles-for-
climate-taxonomy.pdf.

12