A green taxonomy is an official classification or catalogue that defines a minimum set of assets, projects, and sectors that are eligible to be defined as “green” or environment-friendly.
Green taxonomy supports emerging national policy and voluntary private sector initiatives by augmenting sustainable finance including reducing costs and uncertainty in classifying a core set of green activities.
Green taxonomy as a guide seeks to clarify which investments are environmentally sustainable, in the context of which a country defines a green economy. Its main aim is to prevent greenwashing and to help investors make greener choices as well as allocate capital to support a low-carbon climate-resilient economy.
Green taxonomy can be used by investors and other financial sector participants to track, monitor, and demonstrate the credentials of their green activities more confidently and efficiently.
Kenya has already developed a Green Economy Strategy and Implementation Plan 2016-2030 that seeks to propel the country on a new economic trajectory characterised by low emissions, resource efficiency and higher economic growth, in line with international best practices and national priorities.
Currently, the Treasury is developing the National Green Fiscal Policy Framework to enhance private sector financing of climate actions, spur green innovation and technology development, improve green fiscal consolidation and help identify smarter ways for government taxation and spending.
By setting appropriate economic instruments to establish economic incentives and price signals, green fiscal policies can help shift consumption patterns and drive private investments in voluntary compliance in projects that adopt cleaner production mechanisms, reduce greenhouse gas emissions and build the resilience of communities against the negative effects of climate change and pollution.
According to a study by the United Nations Environment Programme dubbed Green Economy Assessment Report of Kenya 2014, Kenya’s transition to a green economy could produce major economic benefits — equivalent to an estimated $45 billion by 2030 — as well as greater food security, a cleaner environment and higher productivity of natural resources.
All these are good, but the benefits will not mature if we put the horse before the stable.
For a long time, a lack of clarity on which activities and assets can be defined as green has posed a barrier to scaling up green or even climate finance.
For starters, a green finance taxonomy can be referred to when designing national sustainable development strategies including green fiscal policy.
Currently, Kenya is developing a green fiscal policy without a green taxonomy, and this will result in challenges in implementation.
A green taxonomy must be developed and deployed so that the Central Bank of Kenya can use it to support green financing and lending programmes.
Now that a Kenyan financial institution has been accredited by Green Climate Fund, green taxonomy will also go a long way to ensure that the funds go to investments that are certified as green businesses.
Financial institutions can use green taxonomy to align their activity reports and communicate with investors about their green engagement.