India’s climate finance architecture is too wobbly: It needs the firm foundation of sharp definitions

On paper, it all sounds serious. There’s just one problem. Nobody agrees on what ‘green’ actually means.

The recently released draft framework of India’s climate finance taxonomy by the finance ministry, aimed at anchoring our nascent system, is supposed to fix this. Such a taxonomy is meant to define precisely what counts as climate-friendly and what doesn’t.

Instead, the draft reads more like a mission statement. Activities are labelled as climate-supportive or transition-supportive without any actual numbers attached.

It compares poorly with other systems. Consider the EU’s approach. Its taxonomy specifies exact thresholds in terms of grams of carbon dioxide per kilowatt-hour for electricity, emissions per tonne of steel produced, and so on. Nations of the Asean group use a traffic-light system with clear boundaries between green, transition and excluded activities. These aren’t just bureaucratic details. They make climate finance investable by telling investors exactly what they’re buying.

India’s framework, by contrast, leaves interpretations wide open. A coal efficiency project could qualify as transition-supportive under one regulator’s reading and fail under another’s. The same renewable energy project might be green to Sebi but not meet RBI’s criteria. This isn’t flexibility. It’s confusion with consequences.

The real damage would show up in market pricing. Indian green bonds already trade at narrower premiums than comparable global issues, partly because investors can’t verify what’s actually inside them. Without clear definitions, every ‘sustainable’ label is suspect. Banks may understate their climate exposure. Companies can oversell their green credentials. Public institutions might inadvertently finance projects that go against national climate goals.

The usual defence is that India needs flexibility. The economy still depends on coal. Many sectors lack clean alternatives. Small manufacturers cannot handle complex reporting. Strict thresholds might block investment in transition technologies. These are fair points, but they miss the mark.

Flexibility isn’t the same as vagueness. Markets need clarity before they commit capital. The taxonomy’s transition category could be useful if it came with expiry dates. Without deadlines, transition just becomes a permanent label for business as usual. A bank’s transition loan for upgrading coal plants makes sense if there’s a clear timeline for phasing them out. Without that, it’s just regular financing repackaged.

Worse, without uniform definitions, capital flows are likely to get distorted. Investors faced with disclosure overload can’t compare companies across sectors, while credit decisions lack consistent data and public finance institutions work with different playbooks. The result: misdirection of the very capital India needs for its climate transition. In such a scenario, what would actually work?

First, the framework should add numbers. It must specify emissions per unit for power, steel, cement and transport, the sectors that matter most. It should start with domestic benchmarks, not aspirational targets. It must then attach sunset clauses to any so-called transition categories. A technology must either improve over time or it loses that label.

Second, regulators must start talking to each other. Right now, the ministry of corporate affairs captures environmental data one way, Sebi another and RBI a third. We need a coordination body with representatives from all relevant ministries and regulators. The Climate Finance Board could be the authority that sets definitions and resolves conflicts.

Third, we need verification capacity. Sebi has approved some assurance providers but that’s nowhere near enough. India needs a national registry of qualified verifiers using established standards. More certified assessors means better oversight, not just more paperwork.

The stakes are clear. If India sharpens its taxonomy while the system is still taking shape, its definitions can become the backbone of climate disclosure. Investors would trust taxonomy-aligned reports and capital could flow to genuinely transition-ready firms instead of those skilled at re-labelling.

But if the current version stands, it would end up with mandates without meaning. Lots of disclosure, lots of verification stamps, but persistent doubt about what’s behind the numbers. Markets will discount taxonomy-based claims, impacting capital flows.

India must be wary of any climate finance architecture that has an impressive façade but a hollow core. It would be a let-down to have regulatory machinery in place that is unable to do the one thing it’s supposed to: direct capital towards climate solutions.

A window for taxonomy corrections is still open, thankfully, but it may close soon. Once companies adapt their systems to current requirements and market expectations solidify around the existing framework, changes would become much harder and more costly to make.

Numbers create trust. Deadlines create urgency. Coordination creates scale. Without these, India risks turning its climate finance framework into an expensive exercise in theatrics.

The author is an independent expert based in New Delhi, Kolkata and Odisha. Twitter: @scurve Instagram: @soumya.scurve.