What is a climate finance taxonomy, announced by FM Sitharaman?

“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,” according to a report by the government of Canada.

Why is a taxonomy significant?

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.

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.

For India, a taxonomy could bring in more climate funds from international sources. Currently, green finance flows in India are falling far short of the country’s current needs — they only account for around 3% of total FDI inflows to India, according to the Landscape of Green Finance in India 2022 report, published by Climate Policy Initiative.

One reason for abysmally low green finance flows has been a lack of clarity in what constitutes sustainable activity. A taxonomy would change that.

What is the potential for green investments in India?

India has a climate-smart investment potential of $ 3.1 trillion from 2018 to 2030, according to a report by the International Finance Corporation (IFC). The largest space for investment is in the electric-vehicle segment, at $ 667 billion as India aims to electrify all of its new vehicles by 2030. India’s renewable energy sector also continues to be a good investment avenue at $ 403.7 billion, the report added.

Do other countries have taxonomies?

Yes. Many countries have either started to work on their taxonomy or finalised one. 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.

What are India’s climate commitments?

India aims to achieve net-zero economy by 2070. It has also pledged to reduce the emissions intensity of its GDP by 45% by 2030, from the 2005 level. India has committed to achieve about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 as well.