India’s recent budget announced the development of climate taxonomy. This framework will help differentiate economic activities that align with climate and environmental goals, thus harmonizing economic growth with the environment.
The taxonomy is expected to bring standardization and a unified approach to structuring financial instruments and capital raising. It could help address greenwashing, too. However, implementing such taxonomy across sectors presents a significant challenge, requiring thorough checks on technical capacity.
The benefit is that, in the long run, it will shift capital allocation towards climate transition, thus supporting India's long-term climate commitments. Notably, India's banking sector is moving towards greener practices, with the Central Bank of India unveiling a green deposits framework, the Securities and Exchange Board of India (SEBI) introducing a green debt securities framework, and the Reserve Bank of India joining the Central Banks of Supervisors Network for Greening the Financial System.
The climate taxonomy comes against the backdrop of India's recognition of its need to achieve net zero goals. India has called for $1 trillion per year in climate finance for developing countries from 2025.
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