By: Khushbu Ahlawat, Consulting Editor, GSDN
Introduction
As the global climate agenda accelerates, the role of finance in enabling decarbonisation has become central to national and international policy frameworks. For India, achieving its ambitious targets—net-zero emissions by 2070 and the broader vision of Viksit Bharat 2047—requires not only technological innovation but also the mobilisation of large-scale capital toward low-carbon transitions. A critical instrument in this effort is the development of a robust climate finance taxonomy, designed to guide investments into environmentally sustainable and transition-aligned activities.
The release of India’s draft climate finance taxonomy in 2025 was widely seen as a significant step in this direction. However, the absence of progress in the Union Budget 2026–27 has raised concerns about delays in operationalising this framework. This is particularly consequential for hard-to-abate sectors such as steel, cement, and heavy industry, which together account for a substantial share of India’s emissions and require massive capital infusion for decarbonisation. A broader global context further underscores the urgency of developing a robust transition finance ecosystem. Across advanced and emerging economies, governments and financial institutions are increasingly recognising that achieving net-zero targets will require not only green finance for low-carbon technologies but also substantial investment in transitioning existing carbon-intensive systems. Institutions such as the International Energy Agency estimate that trillions of dollars in annual investment will be needed globally to meet climate goals by mid-century, with a significant share directed toward emerging economies like India. At the same time, frameworks such as the European Union sustainable finance taxonomy and evolving disclosure standards are setting new benchmarks for transparency and accountability in climate finance. These developments are reshaping global capital flows, with investors increasingly prioritising jurisdictions that offer clarity, credibility, and regulatory certainty. In this evolving landscape, India’s ability to attract international climate capital will depend on how effectively it aligns its taxonomy, disclosure frameworks, and financial instruments with global standards while addressing domestic priorities. Strengthening transition finance is therefore not only a national imperative but also a strategic necessity for integrating India into the global sustainable finance architecture.
Globally, transition finance has emerged as a key mechanism to support such sectors, enabling incremental emissions reductions where immediate green alternatives are not viable. Yet, in India, the absence of clear definitions, sectoral pathways, and disclosure standards has constrained its growth. In contrast, Japan has developed a structured and credible transition finance ecosystem, supported by detailed guidelines and sector-specific roadmaps. Drawing lessons from Japan’s experience, India has an opportunity to strengthen its climate finance architecture and unlock the full potential of transition finance.
Transition Finance and India’s Climate Taxonomy: Promise and Gaps
Transition finance plays a pivotal role in bridging the gap between current industrial practices and future low-carbon pathways. It enables capital flows to sectors where emissions reductions are technologically and economically challenging, ensuring that decarbonisation efforts are inclusive and pragmatic. India’s draft climate finance taxonomy attempts to provide a structured framework by categorising activities into Climate Supportive and Transition Supportive segments. It incorporates both qualitative principles and quantitative thresholds, including emissions intensity reductions and performance benchmarks. Designed as a dynamic document, the taxonomy allows for periodic revisions to reflect evolving technologies and policy priorities. However, significant conceptual ambiguities persist. The overlap between Tier 2 Climate Supportive and Transition Supportive categories undermines clarity, making it difficult for investors to distinguish between genuinely transformative activities and incremental efficiency improvements. Furthermore, the absence of clearly defined transition pathways and Paris-aligned benchmarks weakens the credibility of the framework. Recent global trends further highlight this gap. While transition bond issuance worldwide has surged—reaching tens of billions of dollars annually—India has yet to witness a single transition bond issuance. This reflects not only regulatory uncertainty but also investor hesitation stemming from the lack of standardised definitions and verification mechanisms. Addressing these issues is essential for scaling transition finance and aligning India’s industrial transformation with global climate goals.
Regulatory Fragmentation and the Need for Coherent Disclosure Frameworks
A major constraint in India’s transition finance ecosystem is the fragmented approach to disclosure and reporting. While regulatory bodies such as the Securities and Exchange Board of India (SEBI) have introduced frameworks like the Business Responsibility and Sustainability Reporting (BRSR), these mechanisms fall short in providing comprehensive and integrated insights into corporate transition strategies. Transition plans—central to credible transition finance—remain inadequately defined and inconsistently disclosed. Although SEBI mandates certain disclosures for transition finance instruments, the requirements are broad and lack specificity. Companies are often required to provide high-level information on emissions targets and strategies, but detailed roadmaps, capital expenditure plans, and technological pathways are rarely included. This fragmentation creates challenges for investors seeking to assess the credibility and alignment of corporate transition efforts. Without a unified framework linking taxonomy classifications with disclosure requirements, it becomes difficult to evaluate risks such as carbon lock-in or transition washing. The absence of mandatory, standardised transition plan disclosures further exacerbates this issue. Recent developments in global climate governance underscore the importance of integrated disclosure systems. Jurisdictions across Europe and Asia are moving toward mandatory climate-related financial disclosures, aligning corporate reporting with sustainability objectives. For India, integrating transition plan disclosures within the BRSR framework and linking them to the taxonomy would represent a critical step toward enhancing transparency, accountability, and investor confidence.
Japan’s Structured Approach: A Model for Credible Transition Finance
Japan’s experience offers valuable insights into the design and operationalisation of transition finance frameworks. Recognising the challenges faced by hard-to-abate sectors, Japan introduced its Basic Guidelines on Climate Transition Finance in 2021, establishing a comprehensive and structured approach to financing decarbonisation.
A key strength of Japan’s framework lies in its emphasis on detailed transition plans. Companies are required to disclose granular information, including emissions reduction targets across different time horizons, capital expenditure strategies, and technological pathways. This level of detail enhances transparency and enables investors to assess the credibility of transition efforts. Another notable feature of Japan’s transition finance framework is its strong emphasis on credibility through third-party verification and continuous monitoring mechanisms. Unlike more fragmented systems, Japan encourages the use of external reviewers to assess whether financial instruments and corporate transition plans align with established guidelines and sectoral roadmaps. This process not only enhances transparency but also reduces the risk of “transition washing,” where funds are allocated to projects with limited or unclear decarbonisation impact. Additionally, Japan’s approach incorporates iterative review mechanisms that allow for course correction if companies deviate from their stated transition pathways. This dynamic oversight ensures that transition finance remains aligned with evolving technological capabilities and climate targets. For investors, such mechanisms provide a higher degree of confidence, as they can rely on verified and standardised information when making investment decisions. In contrast, the absence of similar verification frameworks in India limits the credibility and attractiveness of its transition finance instruments. Incorporating independent verification systems and periodic performance audits into India’s framework could therefore play a crucial role in building trust, enhancing accountability, and ultimately scaling the adoption of transition finance across sectors.
Moreover, Japan has developed sector-specific roadmaps that outline feasible decarbonisation pathways for high-emission industries. These roadmaps serve as critical reference points for both issuers and investors, ensuring that transition activities are aligned with national and global climate goals. The inclusion of follow-up guidance further ensures that deviations from planned trajectories are monitored and addressed. Japan’s dominance in the global transition bond market underscores the effectiveness of this approach. By providing clear guidelines, robust disclosure requirements, and sectoral benchmarks, Japan has created a conducive environment for scaling transition finance. While its model is not without limitations, its core principles—clarity, transparency, and alignment—offer valuable lessons for India as it seeks to develop its own transition finance ecosystem.
Scaling Transition Finance in India: Policy Imperatives and Strategic Pathways
To unlock the potential of transition finance, India must undertake a series of targeted policy reforms aimed at enhancing clarity, coherence, and credibility. First, aligning the climate taxonomy with sector-specific decarbonisation roadmaps is essential. Leveraging existing frameworks developed by institutions such as NITI Aayog and the Bureau of Energy Efficiency can provide a strong foundation for defining transition pathways.
Second, mandating comprehensive transition plan disclosures under the BRSR framework would significantly improve transparency and investor confidence. These disclosures should include detailed metrics, timelines, and governance structures, enabling a holistic assessment of corporate transition strategies.An equally important dimension in scaling transition finance in India is the role of domestic financial institutions and capital markets in driving this transformation. While policy frameworks and taxonomies provide direction, the actual mobilisation of capital depends on banks, institutional investors, and development finance institutions integrating transition criteria into their lending and investment decisions. At present, Indian financial institutions remain cautious due to the absence of standardised risk assessment tools and limited experience in evaluating transition-related projects. Developing sector-specific credit assessment models, green and transition finance indices, and blended finance instruments can help mitigate perceived risks and crowd in private capital. Additionally, the Reserve Bank of India and other regulatory bodies can play a catalytic role by issuing guidance on climate-related financial risks and encouraging stress-testing for carbon-intensive assets. Expanding the corporate bond market to include transition-labelled instruments, along with credit enhancement mechanisms, would further deepen financial participation. By strengthening the capacity and confidence of domestic financial actors, India can move beyond policy intent toward large-scale capital deployment, ensuring that transition finance becomes a mainstream component of its broader economic and climate strategy.
Third, integrating financial incentives and support mechanisms can accelerate the adoption of transition finance. Drawing inspiration from Japan, India could introduce measures such as subsidising assessment costs, providing technical assistance, and promoting best practices through public platforms.
Finally, embedding social equity considerations into the transition framework is critical. The shift toward low-carbon pathways will have significant socio-economic implications, particularly for workers and communities dependent on fossil fuel industries. Adopting a “just transition” approach—focused on reskilling, social protection, and inclusive growth—will ensure that decarbonisation efforts are both equitable and sustainable.
Conclusion
India stands at a critical juncture in its climate transition journey. The development of a robust transition finance framework has the potential to unlock significant capital flows, enabling the decarbonisation of hard-to-abate sectors and supporting the country’s long-term climate goals. However, the current draft taxonomy, while a positive step, requires substantial refinement to achieve its intended impact. Lessons from Japan highlight the importance of clarity, structured guidance, and integrated disclosure systems in building a credible transition finance ecosystem. By adopting these principles and tailoring them to its domestic context, India can overcome existing challenges and create a conducive environment for sustainable investment.
Recent global trends indicate that transition finance will play an increasingly important role in shaping the future of climate action. For India, the challenge is not merely to adopt international best practices but to adapt them in a manner that reflects its unique economic and institutional realities.Looking ahead, the evolution of transition finance in India will also be shaped by the interplay between domestic policy innovation and international climate cooperation. As global climate negotiations increasingly emphasise collaborative mechanisms—such as carbon markets under Article 6 of the Paris Agreement—India has the opportunity to position itself as a key player in shaping the rules and norms of transition finance. Strengthening bilateral partnerships with countries like Japan can facilitate knowledge transfer, technology sharing, and co-financing arrangements, particularly in sectors such as steel, hydrogen, and renewable energy integration. Additionally, multilateral development banks and climate funds are expanding their focus on transition finance, offering concessional financing and risk mitigation tools that India can strategically leverage. Aligning domestic frameworks with these global mechanisms will not only enhance access to international capital but also improve the credibility of India’s climate commitments. In this context, transition finance becomes more than a financial tool—it evolves into a strategic instrument of economic diplomacy, enabling India to balance development imperatives with climate leadership on the global stage.
Ultimately, bridging the gap between ambition and implementation will determine the success of India’s climate finance strategy. A well-designed and effectively implemented transition finance framework can serve as a cornerstone of this effort, enabling India to navigate the complexities of decarbonisation while sustaining economic growth and development.
About the Author
Khushbu Ahlawat is a research analyst with a strong academic background in International Relations and Political Science. She has undertaken research projects at Jawaharlal Nehru University, contributing to analytical work on international and regional security issues. Alongside her research experience, she has professional exposure to Human Resources, with involvement in talent acquisition and organizational operations. She holds a Master’s degree in International Relations from Christ University, Bangalore, and a Bachelor’s degree in Political Science from the University of Delhi.
