Indian Council of World Affairs

India remains one of the world’s most climate-vulnerable nations, facing severe climate impacts and an urgent need to transition towards a sustainable future, which requires unprecedented mobilisation efforts for climate-aligned finance. This article discusses India's efforts towards climate financing and the timely role of climate taxonomy.

Why Climate-aligned Finance Is Important

Global temperatures are expected to surpass the 1.5°C threshold above pre-industrial levels between 2023 and 2027.^[i] To address this, India updated its Nationally Determined Contributions (NDCs)^[ii] and Long-Term Low Emissions Development Strategy (LT-LEDS)^[iii] in 2022, committing to more ambitious actions to reduce greenhouse gas emissions, promote renewable energy and enhance resilience against climate impacts. Climate-aligned investments channel resources into environmental projects and support India’s progress towards the Panchamrit goals.^[iv] For India, this means funding a green transition to net zero, a journey expected to require $2.5 trillion by 2030 and $10 trillion by 2070.^[v] Transitioning to a low-carbon economy calls for new investments and demands a reimagined financial ecosystem.

Policy and Financial Instruments Supporting Climate Goals

To meet the high capital needs of climate action, India relies on a diverse financial ecosystem that includes green finance, public sector enterprises (PSEs), budget allocations, private investments and international funding. Key institutions, such as the National Clean Energy Fund (NCEF), the National Adaptation Fund for Climate Change (NAFCC), the Indian Renewable Energy Development Agency (IREDA), the Solar Energy Corporation of India (SECI), the Climate Change Finance Unit (CCFU) and the National Thermal Power Corporation (NTPC), provide long-term loans to support renewable energy projects and facilitate their development. Additionally, the National Bank for Agriculture and Rural Development (NABARD) strengthens rural resilience by managing domestic and international adaptation funds.^[vi]

The government has implemented financial tools, including the Perform, Achieve and Trade (PAT) scheme, Renewable Energy Certificates (RECs), Renewable Purchase Obligations (RPOs), and Feed-in Tariffs (FITs), to encourage the adoption of clean energy. Domestic commercial banks, Non-Banking Financial Companies (NBFCs), and Multilateral Development Banks (MDBs) are also amongst the primary facilitators. The World Bank and Asian Development Bank (ADB) fund more than 50% of the Global Environment Facility (GEF) projects in India. The Green Climate Fund (GCF) supports investments in adaptation and mitigation while fostering innovation in policy, technology, and finance. Indian ministries and agencies work closely with these international bodies to align global resources with national climate priorities, ensuring a coordinated approach to tackling the funding challenge.^[vii]

Major national schemes reflecting these collaborative efforts are Pradhan Mantri Kisan Urja Suraksha evam Utthan Mahabhiyan (PM-KUSUM),^[viii] Pradhan Mantri Aawas Yojana (PMAY),^[ix] Jal Jeevan Mission,^[x] Atal Mission for Rejuvenation and Urban Transformation (AMRUT),^[xi] Swachh Bharat Mission^[xii] and Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME India Scheme).^[xiii] The Green Energy Corridor,^[xiv] the National Green Hydrogen Mission, the issuance of sovereign green bonds,^[xv] and the Bharat Small Reactor (BSR)^[xvi] programme are amongst the recent initiatives attracting high investments and supporting the building of a climate-resilient infrastructure for India.

Climate Finance Taxonomy: An Essential Step

Despite these efforts, a significant funding gap remains, far surpassing the current allocations. While the energy and urban sectors have received considerable focus thus far, other high-emission areas, like agriculture, manufacturing, and heavy industry, are still underexplored in terms of decarbonisation.^[xvii] The Indian government introduced a draft framework for a national taxonomy in 2025, aimed at defining and standardising climate-aligned investments across different industries.^[xviii]

This draft was developed with the goal of catalysing capital flows for climate mitigation and adaptation. It supports India’s broader development objectives under the Viksit Bharat vision, emphasising sustainable growth, inclusive development, and green infrastructure.^[xix] The framework intends to clearly define what constitutes “climate-aligned” activities, providing a roadmap for investments. This standardisation provides a reference point for regulators and investors in a fragmented ecosystem, aiming to prevent greenwashing^[xx] activities and enhance financial transparency.

The taxonomy majorly targets India’s highest-emission, capital-intensive sectors, including electricity, transportation, industry, infrastructure, agriculture, forestry, and land use. Its three main objectives are to promote resources towards climate-friendly technologies, support resilience in hard-to-abate sectors (such as cement, steel, petroleum, and chemicals), and direct investments towards innovation, indigenous low-emission technologies, and climate-focused research and development. As such, it seeks to serve as a blueprint for credible and verifiable green investments, helping businesses and investors identify projects that meet credible climate criteria. It also aims to boost capital flow from developed markets and international organisations to support India’s green transition.^[xxi]

Conclusion

India is making strides in aligning its financial strategies with climate objectives; however, current investment levels are inadequate to address the magnitude of the challenge. To effectively redirect funding from fossil fuels towards low-carbon alternatives requires collaborative and coordinated responses from governments, banks, and private stakeholders. The climate finance taxonomy provides an instrumental tool in this transition by building clarity on what qualifies as “green”, reducing investor uncertainty and enabling blended finance, guarantees, and public-private partnerships to de-risk investments, forming a strong foundation for India’s green finance efforts.

The global climate finance landscape remains uneven, particularly disadvantageous to the Global South. India’s leadership through platforms like the G20 and BRICS, as well as initiatives like the International Solar Alliance and “One Sun, One World, One Grid”, promotes fairness in equitable financial access.^[xxii] India’s mature climate diplomacy opens opportunities to leverage enhanced international cooperation, technology transfer, and financial support.^[xxiii]

In parallel, a well-structured taxonomy stands to unlock meaningful partnerships and capital flows, strengthening India’s position in global climate governance. As a strategic policy framework, it supports India’s Panchamrit commitments, the Viksit Bharat vision, and the 2070 net-zero target, underscoring that economic growth and environmental responsibility can coexist.

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*Ritika Mourya, Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views expressed are personal. 

Endnotes

^[i] World Meteorological Organization (WMO). 2023. “Global Temperatures Set to Reach New Records in Next Five Years.” World Meteorological Organization, May 17, 2023. https://wmo.int/news/media-centre/global-temperatures-set-reach-new-records-next-five-years (Accessed June 21, 2025).

^[ii] Ministry of Environment, Forest and Climate Change, Government of India. 2022. India’s Updated First Nationally Determined Contribution Under Paris Agreement (2021–2030). United Nations Framework Convention on Climate Change, August 2022.

^[iii] United Nations Framework Convention on Climate Change (UNFCCC). 2023. “Long-Term Low-Emission Development Strategies: Synthesis Report by the Secretariat.” FCCC/PA/CMA/2023/10, November 14, 2023. https://unfccc.int/lt-leds-synthesis-report (Accessed June 25, 2025).

^[iv] Press Information Bureau. 2022. “India’s Panchamrit Climate Commitments Announced at COP26.” Ministry of Environment, Forest and Climate Change, January 3, 2022. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1795071 (Accessed June 25, 2025).

^[v] Press Information Bureau, Government of India, 2022, “India’s Updated Nationally Determined Contribution Communicated to UNFCCC,” Ministry of Environment, Forest and Climate Change, https://www.pib.gov.in/PressReleasePage.aspx?PRID=1868284 (Accessed July 21, 2025)

^[vi] Indian Institute for Human Settlements (IIHS). 2023. Climate Finance in India 2023: Landscape of Climate Finance in India. Bengaluru: IIHS. https://iihs.co.in/knowledge-gateway/wp-content/uploads/2023/11/20231128_Climate-Finance-in-India2023.pdf (Accessed July 18, 2025).

^[vii] Ibid.

^[viii] Ministry of New and Renewable Energy (MNRE), Government of India. PM-KUSUM Scheme. Accessed July 21, 2025. https://pmkusum.mnre.gov.in/.

^[ix] India Brand Equity Foundation (IBEF). "Pradhan Mantri Awas Yojana: A Game Changer for Urban and Rural Housing." IBEF, September 15, 2022. https://www.ibef.org/blogs/pradhan-mantri-awas-yojana-a-game-changer-for-urban-and-rural-housing.

^[x] Jal Jeevan Mission. Government of India. Accessed July 20, 2025. https://jaljeevanmission.gov.in/.

^[xi] Ministry of Housing and Urban Affairs. Atal Mission for Rejuvenation and Urban Transformation (AMRUT). Government of India. Accessed July 21, 2025. http://164.100.87.10/.

^[xii] Ministry of Housing and Urban Affairs. Swachh Bharat Mission. Government of India. Accessed July 21, 2025. https://swachhbharatmission.gov.in/.

^[xiii] Bureau of Energy Efficiency. FAME India Scheme – Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India. Government of India. Accessed July 21, 2025. https://udit.beeindia.gov.in/fame/.

^[xiv] Asian Development Bank. “India: Green Energy Corridor and Grid Strengthening Project.” Asian Development Bank. Accessed July 20, 2025. https://www.adb.org/projects/44426-016/main.

^[xv] Ministry of New and Renewable Energy, Government of India. “National Green Hydrogen Mission.” National Single Window System, accessed July 10, 2025. https://www.nsws.gov.in/portal/scheme/greenhydrogenpolicy#:~:text=The%20Mission%20will%20facilitate%20demand,and%20expeditious%20approvals%20leveraging%20technology.

^[xvi] World Nuclear News. “NPCIL Seeks Proposals for Privately Funded Small Reactor Projects.” World Nuclear News, July 3, 2024. https://www.world-nuclear-news.org/articles/npcil-seeks-proposals-for-privately-funded-small-reactor-projects.

^[xvii] World Economic Forum. 2021. Mission 2070: A Green New Deal for a Net Zero India. World Economic Forum. https://www3.weforum.org/docs/WEF_Mission_2070_A_Green_New_Deal_for_a_Net_Zero_India_2021.pdf (Accessed May 20, 2025).

^[xviii] Ministry of Finance, Government of India, 2025, Draft Framework of India’s Climate Finance Taxonomy, https://dea.gov.in/sites/default/files/%28F%29%20Draft%20Framework%20of%20Indias%20Climate%20Finance%20Taxonomy%20for%20publication%206th%20May%202025%20%281%29.pdf (Accessed June 02, 2025).

^[xix] Press Information Bureau, Government of India. 2023. “Prime Minister Launches ‘Viksit Bharat @2047: Voice of Youth’ Initiative.” https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1985077 (Accessed June 25, 2025).

^[xx] Greenwashing misleading the public to believe that a company or other entity is doing more to protect the environment than it is.
United Nations, 2024, “Greenwashing – the deceptive tactics behind environmental claims,” United Nations Climate Change, https://www.un.org/en/climatechange/science/climate-issues/greenwashing (Accessed June 20, 2025).

^[xxi] International Energy Finance Policy Agency (IEEFA). 2024. Building the Climate Finance Ecosystem: India’s Draft Taxonomy Framework. IEEFA. https://ieefa.org/resources/building-climate-finance-ecosystem-indias-draft-taxonomy-framework (Accessed June 20, 2025).

^[xxii] Wadhwani Institute for Sustainable Development, 2024, “A Brief History of India’s Climate Policy and What Lies Ahead”, https://wifdelhi.org/a-brief-history-of-indias-climate-policy-and-what-lies-ahead/ (Accessed June 24, 2025).

^[xxiii] Bhattacharya, Abhishek, 2021, “Net Zero by 2070: Financing India’s Biggest Infrastructure Buildup,” Observer Research Foundation, November 12, 2021, https://www.orfonline.org/expert-speak/net-zero-by-2070-financing-india-s-biggest-infrastructure-buildup (Accessed June 24, 2025).