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Defining what is ‘green’ is key to ensuring that funds meant for climate-aligned projects flow to only such projects and not elsewhere.
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A company is building a new railway line. Does providing finance for the project come under ‘green finance’?
You can argue both ways.
Yes, it is indeed green finance, because the railway line will mean hundreds of trucks and cars off the roads.
No, the railway line would have been built in the normal course of things, as part of development, and calling it a ‘green project’ would be to make a forced connection.
What exactly is a ‘climate project’ or a ‘green project’? This has been an open question. The lack of proper definition of a green project leads to ‘greenwashing’, passing off conventional financing as ‘green’.
Defining what is ‘green’ is key to ensuring that funds meant for climate-aligned projects flow to only such projects and not elsewhere.
A taxonomy for Climate Finance — a clear classification system that specifies what kind of economic activities can be considered as ‘green’ – was promised by Finance Minister Nirmala Sitharaman in her Budget speech of 2024-25. The government has walked the talk. Earlier this month, the Department of Economic Affairs, Ministry of Finance, released a draft ‘Framework of India’s Climate Finance Taxonomy’; the document has been thrown open for public comments.
After dilating on the (eight) guiding principles behind the taxonomy, the document states that the taxonomy “will cover technologies, measures, projects and activities” that are aligned to ‘mitigation’, ‘adaptation’ and ‘support transition of hard-to-abate sectors’.
Notably, one of the eight guiding principles deals specifically with micro, small, and medium enterprises (MSMEs). It states, “The taxonomy should incorporate specific provisions to ensure that resource flows to MSMEs are not adversely impacted. The taxonomy shall include simplified and proportionate criteria for MSMEs to facilitate their inclusion in the climate finance framework, addressing their resource constraints and ensuring their smooth transition to low-carbon pathways. Proportionality criteria, capacity-building, and simplified reporting mechanisms shall be implemented by financial institutions/regulators to address the unique challenges of the MSMEs to support their climate transition.”
The intention is clear — MSMEs shall be dealt with separately.
Classification
Broadly, the government intends to put activities under these areas into two buckets: ‘climate supportive’ and ‘climate transition’ – the latter being those for which there is no economically-viable technology. ‘Climate supportive’ is further divided into Tier-1 and Tier-2, with subtle differences between them. Basically, these activities are aimed at reducing greenhouse gas emissions, avoiding emissions, helping resilience (adaptation) and research and development (R&D).
This is, as the name suggests, a framework; it is yet to fine tuned. When the taxonomy is complete, a financier will know exactly where to put his money, making it easier for actually green projects to attract funds.
Experts welcome move
Siddharth Srivastava, Partner at the law firm, Khaitan & Co, observes that the framework “is a step towards a better direction, albeit an ambitious one.” Writing in Mondaq, he notes that having “a clear, government-backed taxonomy not only unlocks domestic and foreign capital by bolstering investor confidence, but also reduces greenwashing.”
He further adds that “a lot of positive movement in financing of MSMEs involved in climate transition activities” could be expected. Srivastava calls for the setting up of a body to oversee the implementation of existing regulations issued by authorities such as the RBI and SEBI “to supervise and monitor (against) greenwashing.”
Arjun Dutt, Senior Programme Lead, CEEW Green Finance Centre, sees the framework as a positive step that can “provide a transparent basis for tracking climate-aligned capital flows, which has often been a point of contention associated with international climate finance flows under the UNFCCC.” Dutt told businessline that the framework “can provide the basis for designing policy and market incentives to direct capital towards the country’s climate goals and for aligning these efforts across ministries as well as different levels of government.”
Mahua Acharya, a green finance expert and former CEO, Convergence Energy Services Ltd (CESL), calls the framework a “commendable step” adding, the alignment with international taxonomies is “good and thoughtful”.
Speaking to businessline, Acharya noted, “It is particularly notable that one of the stated objectives is to reduce greenwashing – this is an excellent signal from the government.” She calls for using the document to “classify the reporting of green financial instruments and measure capital flows into the green economy.”
Published on May 25, 2025
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