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

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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.


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


  • 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.

What is Taxonomy?

  • Taxonomy is the practice and science of categorization or classification.
  • Taxonomy is a science that deals with naming, describing and classification.

What is Greenwashing?

  • Greenwashing is a marketing tactic that is used to make a company or its products appear more environmentally friendly than they actually are. This is done to capitalize on the growing demand for environmentally sound products.
  • Greenwashing can convey a false impression that a company or its products are environmentally conscious or friendly, and it is unethical because it misleads investors and consumers who are genuinely seeking environmentally friendly companies or products.
  • Greenwashing can include misleading labeling or burying environmentally unsound practices in the fine print. This can include the use of vague and unverifiable terminology such as “eco-friendly” or “sustainable”.
  • Companies may also cherry-pick data from research to highlight green practices while obscuring others that are harmful.
  • There are no set regulations or definitions for what makes something “sustainable,” so it's up to each investor to determine for themselves what practices are most important in a fund.
  • Some funds are designed specifically to exclude certain industries, such as tobacco, weapons, or oil and gas, while others are built around “green economy” companies in industries like renewable energy or water.
  • Genuine green products or businesses back up their claims with facts and details.
  • Greenwashing can damage brands and affect investor trust.
  • To avoid greenwashing, investors should do their research and look for funds that align with their values. They should also look for companies that provide transparent and verifiable information about their sustainability practices.


  • 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.

Taxonomy and MSMEs in Indian context:

  • 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.
  • 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.

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