What is Climate Finance Taxonomy?

About Climate Finance Taxonomy:

• It is a system that classifies which parts of the economy may be marketed as sustainable investments.
• It helps guide investors and banks in directing trillions toward impactful investments to tackle climate change.
• Taxonomies are frequently used to set standards for classifying climate-related financial instruments (e.g., green bonds), but, increasingly, they serve other use cases where the benchmarking feature is viewed as beneficial, including in the areas of climate risk management, net-zero transition planning and climate disclosure.
• South Africa, Colombia, South Korea, Thailand, Singapore, Canada and Mexico are some of the countries which have developed taxonomies. The European Union has done this as well.
• Significance
  • With global temperatures soaring and the adverse effects of climate change exacerbating, countries need to transition to a net-zero economy: the balance between the amount of greenhouse gas (GHG) that is produced and the amount that is removed from the atmosphere.
  • It can play a pivotal role in doing this as they can help ascertain if economic activities are aligned with credible, science-based transition pathways.
  • They can also give impetus to deployment of climate capital, and reduce the risks of greenwashing.
  • It will enhance the availability of capital for climate adaptation and mitigation. This will help India achieve its climate commitments and green transition.