CLIMATE FINANCE TAXONOMY (Syllabus: GS Paper 3 – Env and Eco)

Context: India's Finance Minister announced plans to develop a 'climate finance taxonomy' to better structure and manage investments in climate-related projects.

Climate Finance Taxonomy

• About: It is a system that classifies which parts of the economy may be marketed as sustainable investments.
• Purpose: It helps guide investors and banks in directing trillions toward impactful investments to tackle climate change.
• Standard Setting: Taxonomies are frequently used to set standards for classifying climate-related financial instruments, such as green bonds.
• Additional Use Cases: They also serve other purposes, including climate risk management, net-zero transition planning, and climate disclosure.

Significance of Taxonomy

• Guiding Transition to Net-Zero: Taxonomies help align economic activities with science-based transition pathways essential for achieving net-zero emissions.
• Reducing Greenwashing Risks: They ensure that climate-related investments are credible and genuinely contribute to sustainability, mitigating the risk of greenwashing.
• Attracting Climate Capital: By clarifying what qualifies as sustainable, taxonomies can attract more international climate funds, addressing the current shortfall in green finance.
• Enhancing Investment Clarity: They provide clear definitions of sustainable activities, reducing ambiguity and improving the effectiveness of green finance flows.

Potential for Green Investments in India

• Climate-Smart Investment: India's climate-smart investment potential is estimated at $3.1 trillion from 2018 to 2030, according to the International Finance Corporation (IFC).
• Electric-Vehicle Investment Opportunities: The electric-vehicle segment presents the largest investment opportunity, valued at $667 billion, as India targets electrification of all new vehicles by 2030.
• Taxonomies in Other Countries: South Africa, Colombia, South Korea, Thailand, Singapore, Canada, and Mexico have developed or are working on their taxonomies.
• European Union Taxonomy: The European Union has also established its own taxonomy.