Finance Minister Nirmala Sitharaman, while presenting the Union Budget for 2024-25, announced that the government would develop a ‘climate finance taxonomy’ to enhance the availability of capital for climate adaptation and mitigation.
All about Climate finance taxonomy
- Climate finance taxonomies are known as ‘green’ taxonomies.
- Climate finance taxonomy refers to a set of standardised regulations and guidelines to inform companies and investors on making impactful investments towards environmental conservation and combating the climate crisis.
- Taxonomies for sustainable climate financing, in general, include a detailed list of economic sectors and activities and corresponding criteria that determine if it aligns with larger climate goals.
- With global temperatures soaring, and the adverse effects of climate change exacerbating, countries need to transition to a net-zero economy. The net-zero economy means the balance between the amount of greenhouse gas (GHG) that is produced, and the amount that is removed from the atmosphere.
- Taxonomies 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.
- Climate finance taxonomies can facilitate financing for investors, credit institutions etc. based on how climate-aligned an entity or an activity is.
- It can therefore direct financial resources towards projects that support climate change mitigation and adaptation.
- Green taxonomies help investors compare investment opportunities and measure their environmental impact.
- A localised climate finance taxonomy can also help align a country’s climate goals with the Paris Agreement and other international climate commitments while accounting for regional factors that influence localised transition pathways.
