Green Taxonomy: Is the framework ready?
Let’s set the context first, as more global concern over climate change is looming up, “Climate finance” has become the buzzword in the world of investments. All investors mandatorily want the inclusion of Climate Risk Mitigation guidelines and tools across all asset class investments, so as to tackle “greenwashing”. One of the ways to address this issue for investors (both public and private) is building a “green taxonomy” — designed to give the necessary insight required to make informed investment choices in sustainable projects.
What is Green Taxonomy?
It is a framework that defines or groups investments that can be called environmentally sustainable. Globally, “Green Taxonomy” is called upon by banks, financial institutions, investors and business houses as a guiding framework to leverage investments and promote green finance, enhance its growth and channelise more capital into climate responsive projects.
Who makes it?
The Green Taxonomy framework is crafted by the government and lawmakers of the country keeping in view their commitment towards Net Zero Carbon emission. Green Taxonomies therefore be conceptualised as realistic as possible in terms of their contribution or consistency towards the sustainable development blueprint of the country. As all the countries have different financial governing structures; some follow highly concentrated federal structure wherein all the financial decisions are taken at a central level, while the others use decentralised models to raise debt and plan sustainable development projects as per their regional requirement.
Global outlook:
In 2020, European Union took a lead and introduced ‘Taxonomy for sustainable activities’ regulations and set out six environmental objectives that are qualified to be classified as economic activities for sustainable activities, which are
· Climate change mitigation
· Climate change adaptation
· Sustainable use and protection of water and marine resources
· Transition to a circular economy, waste prevention and recycling
· Pollution prevention and control
· Protection of healthy ecosystem
Taxonomies are helping most countries to tackle their most urgent environmental problems because these objectives are giving investors a clear mandate as to where and how the financing can be directed so as to positively influence the climate, the environment, and/or social issues. Keeping the EU’s taxonomy as a reference framework, many countries are adopting, customising and building taxonomy as per their local requirement. For example, Colombia’s taxonomy was launched in April 2022, which was majorly based on EU taxonomy with a distinctive priority sector related to land use and soil management, (i.e. agriculture, forestry, livestock) because these sectors are responsible for 59 percent of the country’s greenhouse gas emissions as well as excluding nuclear energy and natural gas.
Nearly 27 countries have now developed or are in different stages of developing such national taxonomies. Including EU and the ASEAN countries, 10 countries have already implemented taxonomies. In Japan and Bangladesh, high-level guidance exists and regulation is being developed or is under the development stage in 13 countries. Singapore’s taxonomy is out for consultation and taxonomies of the Philippines and Brazil are under discussion.
The World Bank has just suggested some common principles to be followed by countries while developing their taxonomies:
1. Define its strategic goal.
2. Select environmental objectives relevant to the country’s sustainable development priorities and agenda.
3. Specify sectors that are expected to deliver on the objectives.
4. Assess and select specific investments in these sectors that contribute to addressing the selected environmental objectives. Whenever possible, the criterion for selection should be the expected performance of these investments in connection with national environmental targets.
5. Identify intended taxonomy users and beneficiaries, their roles, and, ideally, their respective responsibilities in the implementation and use of the taxonomy.
6. Outline reporting guidelines for market actors applying the taxonomy.
Indian outlook:
India has set an aggressive multi-faced target for itself not only to be a 3rd global economy by the end of decade but also a market leader in various sectors including energy sector. India at the COP26 summit updated its Nationally Determined Contribution (NDC) target as:
· Long term goal of reaching net-zero by 2070
· To reduce Emissions Intensity of its GDP by 45 % by 2030, from 2005 level
· To achieve about 50 % cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030, with the help of transfer of technology and low-cost international finance including from Green Climate Fund (GCF)
As per the report ‘Currency & Finance 2022–23’ published on 3rd May 2023 by the Reserve Bank of India’s (RBI) Department of Economic and Policy Research (DEPR) that the cumulative total expenditure for adapting to the climate change in India is estimated to reach ₹85.6 lakh crore (at 2011–12 prices) by 2030.
Further, to achieve a net-zero target by 2070, India is estimated to require an investment of US$ 10 trillion.
Underpinning these massive targets, the amount of green investment required, the relatively underdeveloped Indian financial market, the small pool of domestic institutional investors, and the tight investment regulations imposed on such investors make foreign private capital investment crucial for India’s green transformation. The only green taxonomy we have in India is the ORF green taxonomy 2022.
In order to attract international funds (specially private funds) and to manage the risk perception of a developing economy, India dreadfully needs a framework that would standardise the definition of ‘green’ investment and identify the segments where ‘green’ investments to be allocated depending on the GHG index. India needs a rule book which can clarify all green investment related queries for all the stakeholders and would help drive investment decisions towards sustainability and progressive climate action.
A ‘green taxonomy’ document is a need of the hour solution India is seeking so as to attract investor’s community towards standardised and globally acceptable investments. Coherent green taxonomy can reduce information asymmetry and avoid green interpretations issues. There is a significantly large availability of green funding globally. The signatories to the UN-backed Principles for Responsible Investment (PRI) together represent over $150 trillion in assets under management. The sustainability indexed funds, benchmarked to environmental, social, and governance indices, have another $300 billion. The impact investing world has another $1 trillion to add to the green shift.
Despite these, the share of global private financing in green assets is less than 5% therefore it becomes much more significant for India to roll out ‘green taxonomy’ documents to attract more private funds however due to the both macro and micro economic factors India’s taxonomy document is still under development stage. This has to factor in the cultural nuances, geographic issues, market intelligence, scientific temper and ability to keep it simple. Only a deeply incisive taxonomy can help India tap into global green funding.
However, to fulfil its ambitious 2070 Net zero target, India has already started aggressively working on the line of sustainable finance and doing heavy lifting in the policy changes, introducing climate mission programs and fund raining road-shows (to name a few)
· On January 25, 2023, India issued the first tranche of its first sovereign green bond worth INR 80 billion (equivalent to $980 million). On February 9, 2023, the Government of India announced the issuance of another INR 80 billion ($968 million) in sovereign green bonds. Indian green bond issuances have reached a total of $21 billion as of February 2023 which is the highest amongst the other emerging Asian economies excluding China.
· On 4th January 2023, the Union Cabinet approved the National Green Hydrogen Mission with an outlay of ₹ 19,744 crore from FY 2023–24 to FY 2029–30. The overarching objective of the Mission is to make India a global hub for production, usage and export of Green Hydrogen and its derivatives. Investments in this sector via the Foreign Venture Capital Investor (FVCI) route will also be explored. Adoption of green hydrogen can enable India to abate 3.6 gigatonnes of CO2 emissions cumulatively between now and 2050 and reduce industrial coal imports by 95 per cent.
· In order to enhance the ESG compliance which is the foremost parameter of Principles for Responsible Investment (PRI), SEBI, initially directed top 150 listed companies to disclose and obtain a reasonable assurance on Business Responsibility and Sustainability Report (BRSR) Core parameters from FY24 and that will be gradually extended to the top 1,000 listed entities by FY27.
· To achieve an announced target By 2030 of electric vehicle (EV) sales penetration of 30 per cent for private cars, 70 per cent for commercial vehicles and 80 per cent for two and three-wheelers the government introduced FAME I (year 2015 — budget INR 795 crore) and FAME II (year 2019 — budget INR 10,000 crore) production linked incentive scheme.
The Road ahead:
As more and more countries are working towards their country specific taxonomies, so far in absence of any standardised framework adopted by all countries there are high possibilities of less interoperability and portability of the policies between countries as one countries’ classification of ‘green’ economic activity can differ from other, leading to more chaotic investment environment.
As there seems to be no immediate way to standardise the ‘Green Taxonomy’ globally, various regional forums and countries with common interest are coming together and forming a common platform for sustainable activities like the European Union, Central American taxonomy (lead by Colombia) and ASEAN region. Also, the International Platform on Sustainable Finance (IPSF) published an Common Ground Taxonomy instruction report in June 2021 that will serve as a shared reference point for understanding how environmentally sustainable investments are defined in IPSF jurisdictions. The current version of the CGT covers 72 climate change mitigation activities that share common ground for both the EU and China taxonomies with regard to the “substantial contribution” criteria.
Bibliography:
https://www.ecofact.com/blog/green-taxonomies-around-the-world-where-do-we-stand/
https://futureofsustainabledata.com/taxomania-international-overview-update-2022/
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RCF03052023395FAF37181E40188BAD3AFA59BF3907.PDF
https://www.financialexpress.com/opinion/indias-own-green-taxonomy/3029186/
https://www.orfonline.org/wp-content/uploads/2021/12/ORF_Monograph_Green-Taxonomy.pdf
