Climate Finance Taxonomy

Source- This post on the Climate Finance Taxonomy has been created based on the article “What is a climate finance taxonomy, announced by FM Sitharaman?” published in “Indian Express” on 25 July 2024.

The Union Budget for 2024-25 included an announcement by the finance minister about developing a ‘climate finance taxonomy’ in India.

About Climate Finance Taxonomy:

1. About: It is a system that classifies which parts of the economy can be marketed as sustainable investments.

2. Purpose: To guides investors and banks in channeling funds toward impactful investments to combat climate change.

3. Uses: To sets standards for climate-related financial instruments (like green bonds) and serves in climate risk management, net-zero transition planning, and climate disclosure.

4. Global Examples: Countries like South Africa, Colombia, South Korea, Thailand, Singapore, Canada, Mexico, and the European Union have developed their own taxonomies.

5. Significance:

i) Net-Zero Economy: It helps countries transition to a net-zero economy, balancing the production and removal of greenhouse gases (GHG).

ii) Alignment with Science: It ensures economic activities align with credible, science-based transition pathways.

iii) Climate Capital Deployment: It encourages the flow of funds toward climate adaptation and mitigation.

iv) Greenwashing Prevention: It reduces the risk of misleading claims about environmental benefits (greenwashing).

v) Capital Availability: It increases capital for climate initiatives, aiding India in meeting its climate commitments and green transition goals.

UPSC Syllabus: Environment