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Dr. Agyeya Tripathi has completed his Ph.D. and holds a Masters degree in Business Administration and another Masters in Electronics and Communication. He is a national resour LESS … MORE
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:
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:
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:
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:
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.
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Views expressed above are the author’s own.
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