A step towards global sustainability

As climate change continues to disrupt economies worldwide, the shift to sustainable financial models has become more urgent than ever. Green taxonomy—a structured way of classifying economic activities based on their environmental impact—has emerged as a key tool in this transition. By defining what qualifies as “green,” this system helps direct capital towards truly sustainable initiatives, reducing the risk of greenwashing (false sustainability claims).

Across the globe, sustainable finance is booming, with ESG (Environmental, Social, and Governance) assets surpassing $35 trillion in 2022. Countries like the European Union, China, and South Africa have already implemented structured green taxonomies to guide their investment landscapes. However, a major challenge remains: the lack of a globally standardized assessment framework. According to the United Nations Environment Programme Finance Initiative (UNEP FI), nearly 30% of green investments fail to meet sustainability benchmarks due to inconsistent classification and reporting.

For India, this challenge is especially relevant. The Reserve Bank of India (RBI) projects that the country’s green finance market will reach $300 billion by 2030, with renewable energy alone requiring at least $150 billion in the next decade. Without a clear taxonomy, the risk of greenwashing increases, undermining India’s sustainability goals. A well-defined framework can not only ensure responsible investment but also attract global funds seeking transparency in green finance.

Understanding green taxonomy

At its core, green taxonomy serves as a rulebook for defining sustainable economic activities. It brings clarity to financial markets, ensuring that investments in “green” projects are genuinely beneficial to the environment.

The European Union (EU) has set a global benchmark with its green taxonomy, which categorizes activities based on six environmental objectives:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of bodiversity and ecosystems

For India, a green taxonomy must address its own unique challenges—poverty, energy access, sustainable agriculture, and water security. While drawing inspiration from global models, the Indian framework should align with national priorities and developmental needs.

The role of financial institutions in green taxonomy

Banks, investors, and financial regulators are at the heart of green finance. However, the lack of a standardized framework makes it difficult for them to assess which projects genuinely support sustainability. A clear taxonomy would provide:

• A structured approach for assessing environmental impact, helping banks and investors make informed decisions.
• Incentives like lower lending rates for green projects, encouraging more capital flow into sustainable sectors.
• A boost to green bonds and ESG investments, making sustainability an integral part of India’s financial ecosystem.
• Global alignment, making India a more attractive destination for foreign green investments.

Emerging technologies are also shaping the green finance landscape. Fintech and digital lending platforms are using AI-driven models to assess the sustainability of projects, while blockchain is enabling transparent carbon credit trading. According to the International Finance Corporation (IFC), fintech-led climate finance could mobilize over $5 trillion annually in private investments by 2030.

Microfinance institutions (MFIs) are playing a crucial role in expanding green finance to rural entrepreneurs. From solar-powered irrigation to biogas plants, small-scale projects are receiving microloans that promote sustainability at the grassroots level. Data from the Microfinance Institutions Network (MFIN) shows that over $2 billion in microloans have already been allocated to green projects in India, supporting local communities in their shift towards eco-friendly livelihoods.

Challenges in implementing green taxonomy

Despite its potential, implementing a green taxonomy in India comes with hurdles, including:

• High compliance costs – Adhering to sustainability guidelines can be expensive, especially for small businesses.
• Risk of greenwashing – Without proper verification, companies may exaggerate their environmental impact.
• Limited access to green finance – Many sectors, particularly agriculture and MSMEs, struggle to secure funding for green projects.
• Integration with existing financial frameworks – Aligning green taxonomy with current financial regulations requires careful coordination.
• Data gaps and transparency issues – India lacks a centralized system for tracking sustainability metrics, making it difficult to measure the impact of green projects.
• Unclear regulatory frameworks – The absence of clear rules on taxonomy compliance creates uncertainty for businesses and investors.
• Lack of technical expertise – Many financial institutions still need training in evaluating green investments.

A phased approach seems to be the most practical solution. Initially, India can focus on well-established green sectors like renewable energy, waste management, and water conservation. Over time, the taxonomy can expand to cover industries like agriculture and manufacturing, which require more complex sustainability assessments.

Expected benefits of green taxonomy for India

If successfully implemented, a green taxonomy can:

• Attract foreign investment – Investors are increasingly prioritizing sustainability. A structured taxonomy will position India as a credible market for green funds.
• Mitigate climate risks – Properly classified green projects will help India reduce emissions and adapt to climate change.
• Drive economic growth – A sustainable economy can create jobs in renewable energy, waste management, and green tech sectors.
• Enhance global competitiveness – Aligning with international sustainability frameworks will improve India’s standing in global trade and investment markets.

However, for this to succeed, strong governance is essential. Regulatory bodies must oversee compliance, robust data collection mechanisms should be in place, and verification processes must be enforced to prevent greenwashing.

By learning from global best practices while addressing domestic economic realities, India can create a green taxonomy that balances sustainability with industrial growth. The right policies and financial incentives can ensure that India not only meets its climate commitments but also paves the way for a greener, more resilient economy.

Facebook
Twitter
Linkedin
Email

Disclaimer

Views expressed above are the author’s own.

END OF ARTICLE

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}