At COP28, Rwanda announced the first phase of its green taxonomy, a classification system that clarifies environmentally sustainable activities, to help catalyse private financing to green projects.
Once finalized, the taxonomy will provide clear signals on which projects and activities align with Rwanda's climate goals and help direct private capital flows to finance those activities.
Rwanda is pursuing a green growth approach for development and requires an estimated $11 billion for 2030 climate action plan also known as National Determined Contributions (NDCs) under the Paris Agreement.
To achieve this, the country needs to mobilize investment from multiple channels both in public and private sectors, and consequently contribute to Rwanda's vision of being a climate-resilient and carbon-neutral economy by 2050.
Spearheaded by Kigali International Financial Centre in collaboration with other institutions, the green taxonomy is expected to lay a strong foundation for green transformation, the creation of new industries and effort to position Rwanda as a sustainable finance hub of East Africa, according to the initiative's working paper.
Once completed, it will be the second taxonomy in Africa, following South Africa.
"Taxonomy is an important domestic policy tool that can make a significant contribution to achieving climate goals by creating a direct link between the economy and the financial market on the one hand and climate effects on the other, which can help a country attract money from climate-conscious international investors, and adapt its economy to the inevitable impacts of climate change," the paper stated.
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It will be applicable to different sectors of priority that significantly contribute to climate change mitigation or climate change adaptation, including agriculture, energy, construction, transport, manufacturing, and waste.
The relevance, for instance, can be seen in the construction sector where the target is to achieve green urbanisation and low-carbon urban settlements.Rwanda is one of the most densely populated countries in Africa with 445 people per square kilometre with an average urbanization growth rate of 6.4 percent per year, and this urbanization and human settlements is faced with climate change threats.
Green building design and construction offers an opportunity to use resources more efficiently, use locally sourced materials, improve construction techniques, and create job opportunities for a sector.
A robust green finance taxonomy has significant advantages for different groups, including investors, issuers of green bonds, regulators, policymakers, bankers, and society, as seen across different implementing countries.
Taxonomy in bond issuance
One of the highlighted benefits of a green taxonomy is the support to both public and private sectors in issuing green bonds and loans by providing a clear framework to promote investor confidence.
"Banks can develop bond or loan standards based on the taxonomy to incorporate its principles into their activities. For issuers of green bonds that report taxonomy alignment, a taxonomy provides credibility and legitimacy. This makes it easier for them to attract green investments and gain investors' trust."
