What is Climate Finance Taxonomy?

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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.

Q1: What are Sustainable Development Goals (SDGs)?

They recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

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