India’s draft climate finance taxonomy needs clearer definitions, sectoral pathways, and mandatory transition-plan disclosures to unlock transition finance, drawing lessons from Japan’s structured guidelines framework
The Union Budget 2026–27 was expected to advance and potentially finalise India’s climate finance taxonomy, a critical tool for directing capital towards decarbonisation in line with India’s Viksit Bharat 2047 vision and the 2070 net-zero target. However, no progress has been made since the Ministry of Finance released the draft taxonomy in May 2025. The taxonomy is central to India’s decarbonisation strategy for hard-to-abate sectors, such as steel and cement, which account for 21 percent of national emissions and require substantial capital for transition.
Transition finance enables the flow of capital to help hard-to-abate industries shift towards lower-carbon pathways, particularly where affordable green alternatives remain unavailable. However, its growth has been slow due to insufficient regulatory guidance and unclear definitions, which heighten the risks of transition washing and carbon lock-in.
Transition finance enables the flow of capital to help hard-to-abate industries shift towards lower-carbon pathways, particularly where affordable green alternatives remain unavailable.
The Organisation for Economic Co-operation and Development (OECD) defines carbon lock-in as the continued use of fossil-fuel infrastructure despite the availability of low-emission alternatives, thereby delaying or preventing the transition to such alternatives. Carbon lock-in also raises the risk of transition washing, in which finance is directed towards entities that lack credible or time-bound net-zero transition plans.
A climate finance taxonomy can help address these gaps by providing clear definitions and classification criteria, thereby facilitating the identification of projects aligned with national transition goals. There are currently around 33 taxonomies globally, including the Association of Southeast Asian Nations (ASEAN) Taxonomy for Sustainable Finance and the European Union (EU) Taxonomy for Sustainable Activities. India’s draft taxonomy has the potential to scale transition finance by offering a structured framework for identifying credible transition activities aligned with sector-specific pathways.
In the absence of a finalised taxonomy and clear definitions, the uptake of transition finance in India remains limited, with no transition bonds issued to date, even as global transition bond issuance reached approximately US$ 32.5 billion in 2024. In contrast, Japanese issuers launched multiple transition bonds, accounting for 91 percent of global transition bonds in 2022, a year after the Ministry of Economy, Trade and Industry (METI) released its transition finance guidelines. A comparison of the key frameworks enabling transition finance in India and Japan highlights lessons from Japan’s experience that India can adopt to strengthen its transition finance landscape.
India’s draft taxonomy has the potential to scale transition finance by offering a structured framework for identifying credible transition activities aligned with sector-specific pathways.
The draft taxonomy’s qualitative component outlines the objectives and principles for identifying climate-relevant activities. The quantitative component specifies performance thresholds, including expected greenhouse gas (GHG) reductions, best-in-class benchmarks, and emissions-intensity improvements. Designed as a living document, the taxonomy allows for periodic revisions based on evolving targets, technologies, and regulatory developments.
One of the eight principles of the draft taxonomy focuses on supporting transition activities for which no feasible low-emission alternative exists in India. Accordingly, activities eligible for climate finance, including transition finance, are classified into Climate Supportive (Tier 1 and Tier 2) and Transition Supportive categories.
Figure 1: Classification under the taxonomy
Source: India’s Draft Climate Finance Taxonomy, 2025
However, the classification adopted in the taxonomy suffers from conceptual ambiguity, particularly in its treatment of Climate Supportive Tier 2 and Transition Supportive activities. Both categories include measures aimed at improving energy efficiency or reducing emissions intensity in sectors where absolute emissions avoidance is not yet technologically feasible, resulting in overlap and weak differentiation.
The Transition Supportive category lacks defining features typically associated with credible transition finance, such as time-bound decarbonisation pathways and Paris-aligned benchmarks, which should be reflected in transition plans.
India’s approach towards the disclosure of transition plans remains fragmented and lacks coherence across regulatory frameworks. A transition plan articulates a company’s strategy to mitigate and manage climate-related risks, outlining periodic actions and the operational and financial metrics used to achieve these objectives. While transition plans are not mandated under the taxonomy, the Securities and Exchange Board of India (SEBI), through its 2023 circular, requires transition finance issuers to disclose such plans in their offer documents. However, the information required in these plans remains broad, limited to interim targets, indicative timelines, and high-level disclosures on project strategy and technology use.
Additionally, for investors assessing companies aligned with net-zero transition pathways, SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework offers limited support. Although listed companies are required to disclose comparable information on their environmental, social, and governance performance, including key transition-related metrics such as GHG emissions, the framework does not mandate disclosure of a comprehensive transition plan. As a result, transition-related elements remain scattered across multiple BRSR sections, making it difficult for investors to link targets, actions, and governance structures.
To establish transition finance as a credible financing instrument for decarbonisation in hard-to-abate sectors, Japan released the Basic Guidelines on Climate Transition Finance in 2021 to enable companies, banks, and investors to label and raise funds for decarbonisation investments. The guidelines are based on the International Capital Market Association’s Climate Transition Finance Handbook and focus on the use of proceeds, key performance indicators, and corporate transition strategies.
The guidelines require detailed disclosure of an issuer’s transition plan, including key GHG reduction levers, a granular capital expenditure roadmap, and associated technological, operational, and regulatory implications. Issuers must disclose short-, medium-, and long-term emissions reduction targets, base years, and historical emissions data, including absolute emissions when intensity-based metrics are used.
Japan has released sector-specific roadmaps indicating credible transition pathways for high-emission sectors.
To address the diversity in transition strategies across industries, Japan has released sector-specific roadmaps indicating credible transition pathways for high-emission sectors. The roadmaps serve as an evaluation and verification tool, guiding external reviewers and financiers in determining whether proposed activities qualify as transition-eligible. Moreover, the Transition Finance Follow-up Guidance addresses deviations from the assumed progress in the roadmaps, ensuring transition efforts remain ambitious and effective.
As both India and Japan rely on fossil fuels for over 70 percent of their energy demand and share converging transition strategies, reflected in their Memorandum of Cooperation (MoC) under Article 6.2 of the Paris Agreement, Japan’s transition finance framework offers relevant lessons for decarbonisation. While Japan’s transition finance taxonomy has limitations, several underlying principles provide useful insights for strengthening the operationalisation of transition finance in India:
1. Align the Taxonomy with Decarbonisation Roadmaps and Targets
India should adopt a sector-specific definition of transition activities that recognises the heterogeneity of firms’ industrial characteristics and regional contexts. Japan’s use of sectoral roadmaps to assist companies in considering climate change measures, and to guide financial institutions in determining eligible transition activities, demonstrates how eligibility can be assessed within clearly articulated pathways rather than through static thresholds.
While the draft taxonomy anticipates the development of sectoral pathways to inform eligibility, India should leverage existing decarbonisation roadmaps rather than overcrowding the policy architecture. The final taxonomy could build on the recently published decarbonisation roadmaps by NITI Aayog and the Bureau of Energy Efficiency’s GHG Emission Intensity Targets for high-emission sectors to identify activities that may qualify as credible transition activities at different stages of decarbonisation.
2. Mandate Disclosure of Transition Plans under BRSR Framework
India should mandate the disclosure of climate transition plans under the BRSR framework, accompanied by clearly specified metrics. Investors require integrated visibility into how corporate ambition, transition strategy, and financial alignment converge, rather than relying on fragmented or static indicators. In Japan, the guidelines require this information to be disclosed in companies’ integrated and sustainability reports, as well as statutory documents, thereby linking transition plans to Japan’s disclosure framework.
Linking the BRSR framework with the taxonomy by phasing in mandatory transition-plan disclosures, with differentiated metrics for large enterprises and MSMEs, would significantly enhance the usability of BRSR data for transition finance.
Linking the BRSR framework with the taxonomy by phasing in mandatory transition-plan disclosures, with differentiated metrics for large enterprises and MSMEs, would significantly enhance the usability of BRSR data for transition finance. This integration would also improve interoperability with international disclosure standards, aligning India with the growing global trend of mandating climate transition plan disclosures.
3. Integrate Support Mechanisms and Social Equity Principles
Fiscal incentives and support mechanisms, including capacity-building and cost-sharing initiatives, should complement the taxonomy’s operationalisation. Japan offers a useful reference, as it subsidises assessment costs for projects that conform to its guidelines while publicly disseminating information on such cases to promote best practices.
The social costs associated with transition efforts in hard-to-abate sectors must be addressed by incorporating basic social safeguards in the taxonomy to protect affected workers and communities. For example, transitions in the power sector may entail downsizing coal-fired power plants, leading to unemployment and livelihood loss, which can be mitigated by adopting a ‘just transition’ approach, similar to Japan’s efforts towards gender mainstreaming in the energy sector.
While the draft taxonomy is a positive step towards strengthening India’s climate finance architecture, it remains largely broad and lacks the specificity required for effective implementation. Greater clarity and measurable thresholds are essential to provide certainty to investors and enable the scaling of transition finance. Its impact could be significantly enhanced by incorporating international best practices, such as Japan’s structured transition finance framework, and adapting them to India’s sectoral realities and institutional capacities.
Pranita Gupta is a Research Intern at Observer Research Foundation.
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