By Vibhuti Garg and Shantanu Srivastava
The world needs an annual investment of US$9.2 trillion for climate mitigation alone and even more for climate adaptation. Aligning with Paris Agreement goals requires investments in emerging markets and developing economies to more than triple from current levels by the early 2030s. Although there is sufficient financial capital globally to finance the energy transition, it is spread unevenly, with most capital providers concentrated in the developed world. There is a need to mobilise this finance via changes to the global financial architecture. One such change is having a common language and definition of what is green or sustainable.
By providing a clear, science-based definition, a taxonomy can help classify sustainability in black and white. A definition that countries can refer to avoid misinterpretation and minimise any catastrophic environmental impact. Taxonomy is a key framework item identified in the G20 Sustainable Finance Roadmap and a focus of the International Platform on Sustainable Finance (IPSF), which has developed a common-ground taxonomy (CGT) to promote interoperability globally.
IPSF is a network of policymakers that share best practices and compare sustainable finance approaches and tools to make them more interoperable. It is also a G20 Sustainable Finance Working Group (SFWG) knowledge partner.
There are diverse taxonomy development efforts underway globally. Taxonomies have different methodologies, definitions and eligibility criteria/thresholds to classify activities as green and non-green. Taxonomies may be whitelist-based (identifying specific activities and technologies as green, such as China), technical screening criteria-based (technology neutral, such as the EU) or principle-based, such as Malaysia and Japan. Further, data collection and verification processes and disclosure regimes may vary even when approaches are consistent.
There are 29 jurisdictions at different stages of taxonomy development, including several G20 countries. A harmonised taxonomy can accelerate the deployment of climate capital and facilitate smoother cross-border flows, lower transaction costs, curb greenwashing and promote the integrity of net-zero transitions.
From an Indian perspective, while the official green taxonomy is still a work in progress, regulators have adopted their own definitions of sustainable investments. The Reserve Bank of India issued its inaugural green deposits framework specifying several green project categories. Similarly, the Securities and Exchange Board of India also notified the green debt securities framework, which lists eligible green activities. The country needs one definition to provide clarity to investors for its clean energy transition. With India now introducing a domestic carbon market and green credit programme, taxonomy can help identify green projects and remove ambiguity.
A taxonomy will also help channel capital into energy transition for the MSMEs. Banks may be reluctant to finance them without established thresholds and definitions of what constitutes as green. Along with taxonomy development, it is also essential to ensure MSMEs have the capacity to capture and report on their emission profiles. They would require capacity building and financial resources in this regard. With the development of CGT, some steps have started in this direction. Still, there is a need for an international body that can harmonise and intermediate the taxonomy development process within different parts of the world.
The G20 can help harmonise economic activities, science-based definitions, eligibility thresholds and, more importantly, clearly categorise green versus transitionary assets to avoid any greenwashing risks in funding the latter. It can be a platform for integrating future global market and technology development changes into taxonomies.
Under its presidency, India can push for concerted global efforts on developing a harmonised green taxonomy. Although harmonisation may not be possible for all the 29 taxonomies, a common language and defining elements of interoperability remain at the heart of G20 reforms to enable enhanced cross-border capital flow. Science-based approaches should form the basis for this, to provide clear metrics and thresholds without letting the political economy dilute the definition. This should be informed by transition pathways in a sector/jurisdiction, considering the sustainable development goals (SDGs) and also the local context. India must ensure that the global taxonomy considers the unique circumstances of the developing economies.
Further, India should push for creating a cross-border task force of G20 members to support the work of IPSF. The country can facilitate high-level dialogues as part of the SFWG and international financial architecture working group meetings to focus on harmonisation of taxonomies.
Writers are respectively, director, South Asia, and sustainable finance & climate risk lead, South Asia, IEEFA