MUMBAI: The work to frame a taxonomy framework for climate finance has already started, and we hope to have that in place over the next eight to ten months, a senior finance ministry officer has said.
“In the budget 2025, the finance minister (Nirmala Sitharaman) has announced to come out with a taxonomy for climate finance. The work on that has already started, and we hope to have that in place over the next eight to ten months,” Ajay Seth, Secretary, department of financial services, told a CII-organised financing summit here Tuesday.
A climate finance taxonomy 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 of dollars/rupees toward impactful investments to tackle climate change.
He also expressed the government interest in “partnering with industry experts to put that taxonomy framework together. It will take about eight to ten months or maybe about six to eight months, but that's an exercise we have started.”
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 that have developed taxonomies. The European Union has done this as well.
India needs climate-smart investment potential of $3.1 trillion from 2018 through 2030, according to an International Finance Corporation report. The largest space for investment is in the electric vehicles segment, at $667 billion as the government has set a target of electrifying all its new vehicles by 2030. The renewable energy sector also continues to be a good investment avenue at $403.7 billion, the report added.
Announcing the budget for the current fiscal on July 23, Sitharaman announced that the government would develop a ‘climate finance taxonomy’ to enhance the availability of capital for climate adaptation and mitigation. This will help the country achieve its climate commitments and green transition.
“Taxonomies are frequently used to set standards for classifying climate-related financial instruments (eg. 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 Canadian government.
With global temperatures soaring, and the adverse effects of climate change only getting worse each year, all countries especially those with long coastlines, need to transition to a net-zero economy, which is the balance between the amount of greenhouse gas 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.
According to excerpts, for a country like ours, a taxonomy can bring in more climate funds from international sources. Currently, green finance flows into the country are falling far short of the current needs, accounting for just about 3 per cent of total FDI inflows. One reason for such abysmally low green finance inflows is the lack of clarity on what constitutes sustainable activity. A taxonomy can change that.
The government has set a deadline of becoming a net-zero economy by 2070 and has also pledged to reduce the emissions intensity of GDP by 45 per cent by 2030, from the 2005 level apart from committing to achieve about 50 per cent of cumulative installed electricity capacity from non-fossil fuel-based energy resources by 2030.