India’s climate finance taxonomy must put adaptation at the core

A framework built on outcomes, not checklists – especially for adaptation, can attract global capital while reflecting India’s diverse local knowledge and urgent resilience needs.

India’s 2024-25 Union Budget heralded a welcome, timely move: the development of a climate finance taxonomy. Finance remains a crucial lever for India’s burgeoning climate ambitions. Yet, significant hurdles persist, particularly in ensuring this taxonomy is truly ‘adaptation-forward’. 

Despite a steadily expanding green investment landscape, current levels fall far short of India’s  national climate goals. A report by the Climate Policy Initiative highlights that while domestic  sources largely fund green finance, international funding, such as foreign direct investment (FDI),  remains minimal. A stark figure illustrates this: only 3% of total FDI inflows are currently  categorized as green. The new climate finance taxonomy, by clarifying green definitions, is a  positive step towards boosting investor confidence. However, this marks merely the beginning of  a longer journey. 

The need for a green taxonomy

At its core, a climate finance taxonomy classifies activities the Government of India endorses as  climate action. Developing such a framework, especially for adaptation measures, poses a  considerable challenge. India’s vast geographic, cultural, and ecological diversity means traditional and local knowledge systems play a pivotal role in everyday adaptation to climate impacts. These varied regional practices—from traditional water harvesting techniques in Rajasthan to resilient agricultural practices in the North-East—underscore the deeply localised and context-specific nature of adaptation in India. 

The Department of Economic Affairs’ draft climate finance taxonomy offers a valuable  opportunity to forge an adaptation-forward framework. Such a system can identify, validate, and  scale adaptation strategies by attracting targeted investments. The challenge lies in developing an  inclusive taxonomy that incorporates adaptation efforts while respecting their complexity and local  nuance. 

Defining Adaptation’s “How” 

The Intergovernmental Panel on Climate Change (IPCC) defines adaptation as the process of  adjusting to actual or expected climate change effects to moderate harm or exploit beneficial  opportunities, applicable to both human and natural systems. Similarly, the United Nations  Framework Convention on Climate Change (UNFCCC) describes it as adjustments or changes in  ecological, social, or economic systems in response to climatic stimuli and their impacts. These  definitions, using terms like “process”, “change”, and “adjustment”, are inherently subjective. This subjectivity has made adaptation a contested space, shifting the focus from the widely accepted “why” it’s needed to the complex “how” of effective implementation. A “one-size-fits-all” answer to adaptation is impractical, given its highly context-specific and localised nature. Nevertheless, universal agreement exists on adaptation’s ultimate goal: minimising climate change’s adverse impacts on communities and systems. 

As India prepares its first climate finance taxonomy, it is vital that this framework explicitly  reflects the diverse traditional and local knowledge systems that have long underpinned climate  resilience across the nation.

Finding Common Ground: Outcomes, Not Actions 

Over the past four years, 24 climate adaptation taxonomies emerged globally – such as the Standard Chartered Adaptation and Resilience Taxonomy or the Climate Resilience Principles by the Climate Bonds Initiative (CBI) or the UNFCCC Technology Needs Assessment Taxonomy, driven by the urgent need to unlock more finance for adaptation. However, their lack of coherence has often negated their very purpose: increased finance flows. For global investors, some commonality or  interoperability between taxonomies would be highly beneficial, as the current fragmentation adds to confusion. While taxonomies must reflect local realities, ensuring interoperability can  significantly enhance the attractiveness of cross-border adaptation investments. 

Studies show that lists of potential adaptation activities can exceed 100 items. Attempting to create an exhaustive list tailored to India’s immense geographic and social diversity would be inefficient and impractical, especially at the crucial local level. A more effective approach is to focus on outcomes rather than specific actions. A taxonomy built around adaptation’s end goals, such as reducing vulnerability to drought in arid regions or enhancing coastal resilience against sea-level rise, would provide the necessary flexibility to accommodate regional differences in adaptation practices. Such an outcome-based framework would inherently be more inclusive of local and traditional approaches. 

Globally Applicable, Locally Adaptable 

The 2015 Paris Agreement introduced the Global Goal on Adaptation (GGA) as a guiding vision.  The 2023 COP28 finalised the UAE Framework for Global Climate Resilience, outlining seven  thematic and four iterative adaptation cycle targets. These goals provide a robust foundation for  India’s climate taxonomy and are expected to yield concrete indicators for measuring progress.  They can serve as crucial guide rails, ensuring the taxonomy includes clear, measurable targets  that address the needs of marginalised and vulnerable populations. 

Engaging Partners, Attracting Capital 

An outcome-based, inclusive taxonomy would also attract private investment and blended finance  from Multilateral Development Banks (MDBs), which are increasingly exploring innovative  financing instruments. For instance, the World Bank’s August 2024 Amazon Reforestation-Linked  Bond, a 9-year, $225 million outcome bond, offers investors a fixed coupon plus a variable component tied to Carbon Removal Units. This builds on earlier successes like the five-year, $150 million Rhino Bonds in Africa. 

MDBs are shifting towards results-based financing to draw in more private capital. Outcome-based bonds have proven effective in areas traditionally reliant on public funding or philanthropy due to limited short-term profit potential, such as conservation, reforestation, and waste reduction. Adaptation fits squarely within this category. While adaptation actions like afforestation or ecosystem restoration offer immense social and environmental value, they often lack quantifiable short-term economic returns, creating ambiguity about what qualifies as adaptation and how outcomes should be measured. By clearly articulating outcomes in its taxonomy, India can bridge this gap, making adaptation investments more transparent and appealing to both private and  institutional investors. 

A Global Leadership Opportunity 

India’s global climate leadership must extend beyond merely reducing greenhouse gas emissions.  The country is uniquely positioned to spearhead the development of an adaptation-forward climate taxonomy. Facing challenges common to many Global South nations, and already implementing adaptation efforts at scale, India can draw on its diverse local experiences and knowledge systems. This allows for a taxonomy that not only mobilises finance, but also ensures funds are directed where they are most needed. 

Ultimately, for India’s taxonomy to be effective and inclusive, it must focus on outcomes, such as defining adaptation success and how it benefits people and ecosystems. In doing so, India can chart a path for other nations, unlocking climate resilience finance in ways that are just, local, and  impactful. 

Dhriti Pathak is a Climate Change Researcher and Analyst and Rajashree Padmanabhi is an Investor Relations Associate at Climate Fund Managers. Views expressed are personal.

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Dhriti Pathak

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