Harmonising green taxonomy – dealing with the issue of greenwashing in green investments | 20 July 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the utility of a clear global taxonomy of green investment in order to deal with the issue of greenwashing in green investments.

Relevance:

• GS3: Environment financing; Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
• Essay;
• Prelims

Context:

• Climate change is one of the major issues of this century. To deal with climate change (adaptation, prevention, etc.), climate-specific fundings are devised. These are now called green investments or green financing.
• However, there is no universally accepted definition of what should constitute a green investment. For example, In one country, investment in developing a hydroelectric power plant may be considered a green investment, but in other countries it may not be.
• The presence of this ambiguity has given rise to the growing issue of greenwashing of funds.
• Now, India, as a G20 president, can take a step forward to define a clear and global taxonomy for green financing.

Analysis:

• Need of green investments:
  • 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.
• Solution: developing taxonomy for green financing:
  • 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.
• Efforts to develop a taxonomy:
  • 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.
• India’s position:
  • 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.

• Role of India and G20 in developing the global taxonomy:
  • 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.
  • 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.

Way Forward:

• Since its start, global climate financing has come a long way, and this new invention of a global taxonomy will revolutionise the entire landscape of climate financing.