It’s imperative to draft a national taxonomy if India wants to walk the green talk.
This piece is part of the essay series, Shaping our green future: Pathways and Policies for a Net-Zero Transformation.
If current patterns are not reversed, global temperatures will likely rise by greater than 3°C above pre-industrial levels by 2100—this will be a significant breach of the limit of 1.5°C set by the Paris Climate Agreement. The priority of the COP26 summit is to urge nations to be ambitious in updating their 2030 targets and commitments to climate action.
India is the third largest carbon emitter, the second most populated country that is projected to reach its peak population of 1.6 billion by 2048, and one of the fastest growing economies in the world. By adopting a development pathway consistent with the 1.5°C-target amidst its pursuit of becoming a US $5-trillion economy, India will be pivotal in the global calculus of climate change mitigation. It can motivate its peers to heighten their climate action and set a pioneering example of circumventing the complex trade-offs between environment and growth.
India’s transformation into a US $5-trillion economy that remains 1.5°C-compatible, will have to be underpinned by an increase in efficiencies in energy and resource use. This green transformation requires massive investments in the most advanced green technologies and business models, as well as in green infrastructure. This transformation is estimated to require an annual investment of US $200 billion on green infrastructure alone (or 7–8 percent of GDP), and a climate-smart investment of US $300 billion.
It is a task easier said than done. The investment peculiarities of green ventures prevent their risk-return profile from aligning with the principles of lending that guide conventional financial institutions. Moreover, such institutions in India are under stress, a state that has been aggravated by the prolonged COVID-19 pandemic. Financial institutions that thrive on financing underserved investment needs—by leveraging financial innovation, in general, or investment instruments, in particular—naturally lend to green projects. Their customised solutions to green projects have included the use of credit enhancement, aggregation and securitisation, blended finance, Payment for Ecosystem Services (PES), Reducing Emissions from Deforestation and forest Degradation (REDD+), and debt-for-nature swaps.
India must tap foreign private capital to achieve its green transition, given the hefty requirement for green investments, its underdeveloped financial markets, and a dearth in domestic institutional investment. Such global capital is abundant: a collective Asset Under Management (AUM) of US $81.7 trillion under the 1715 signatories to the Principles for Responsible Investment (as of April 2018); some 534 sustainability indexed funds overseeing a combined US $250 billion (as of the end of the second quarter of 2020); and the impact investment market worth US $715 billion. However, global private finance accounted for a meagre 5 percent of tracked national green funds in India for the years 2016–17 and 2017–18.
By adopting a development pathway consistent with the 1.5°C-target amidst its pursuit of becoming a US $5-trillion economy, India will be pivotal in the global calculus of climate change mitigation.
This can be attributed to the high-risk perception of green finance, which is accentuated in the context of emerging economies like India. Compounding the risk perception is the absence of a green taxonomy, which standardises what constitutes as green finance and provides a rulebook for determining the eligibility of economic activities/projects/assets for such finance.
A well-defined taxonomy will reduce the incidence of information asymmetry, rule out plural interpretations of green finance, and minimise the risk of greenwashing. It will provide a transparent understanding of the environmental footprint of economic activities underlying investments.
A green taxonomy can provide the guidance and confidence sought by investors in making environmentally conscious investment decisions. It can provide visibility to capital-starved green sectors, allowing them to attract requisite investments away from renewable energy, which currently accounts for 80 percent of green finance in India. It can be the touchstone for Financial Institutions (FIs) and companies in managing and monitoring the environmental quotient of their financial profile while allowing regulators like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to oversee these entities by mandating disclosures that align with the taxonomy. It can be the reference for strengthening SEBI green bond guidelines that currently allow for multiple definitions of “green” investments. It can facilitate standardisation of data collection, reporting, and impact measurement methodology involved in the construction of ESG indices. It can also be the government’s barometer for tracking the compatibility of environmental outcomes with the vision of global net-zero, while showing the way to appropriate corrections in the case of deviations.
The development of an Indian green taxonomy can borrow insights from existing taxonomies. This essay illustrates this by reviewing some of those taxonomies and deriving learnings that, when tailored to accommodate domestic circumstances, can implicate salient principles for the Indian taxonomy.
Principle 1: A green taxonomy should be developed in a way that has a multipronged impact on green finance.
The taxonomies developed by China, Mongolia, and European Union (EU) countries standardise the notion of “green”, and identify the impacts of such standardisation as the objectives of the taxonomy.
The structure of an Indian taxonomy can be comprehensive enough to generate multiple positive outcomes creating an additive impact on green finance flows. These outcomes have been discussed above.
Principle 2: The taxonomy should focus on India’s most pressing environmental challenges.
There is a significant overlap in the environmental objectives of most taxonomies (e.g., Bangladesh, China, Mongolia, Malaysia, and EU). These include climate change mitigation and adaptation, pollution prevention and control, resource efficiency, conservation of natural resources, and ecosystem/biodiversity conservation. However, the taxonomies diverge in their inclusion of certain sectors and the mechanisms used to achieve specific objectives—merely reflective of the differences in the countries’ prerogatives and obligations. India’s taxonomy must focus on its pressing environmental challenges.
It can also be the government’s barometer for tracking the compatibility of environmental outcomes with the vision of global net-zero, while showing the way to appropriate corrections in the case of deviations.
As mentioned briefly earlier, India is the third largest carbon emitter in the world, accounting for 2.62 billion metric tonnes or 7.2 percent of total global CO2 emissions in 2019. India is the second most polluted country globally, with Delhi being the most polluted capital city, and 22 of the country’s cities listed in the world's 30 most polluted. About 70-80 percent of surface water in India is contaminated and unfit for consumption. India is being confronted by the worst water crisis in its history: 21 of its cities will have exhausted their groundwater reserves by 2020. Moreover, 40 percent of India’s population will have no access to drinking water by 2030. India’s per capita ecological footprint is 1.19 hectares while its per capita biocapacity is 0.43 hectares, implying a biocapacity deficit of 0.76 hectares. More than 90 percent of biodiversity hotspots in India have been lost.
The taxonomy must include the environmental objectives of climate change mitigation, reducing air and water pollution, addressing water scarcity, and arresting ecosystem/biodiversity losses. These are serious challenges in sectors such as energy, manufacturing, transport, agriculture, waste, and buildings. The taxonomy may thus focus on these sectors to maximise the positive environmental outcomes expected to be generated from the taxonomy.
Principle 3: The taxonomy must be anchored in Nationally Determined Contributions, key national plans and policies for environmental action, and national norms and standards.
Almost all national and regional taxonomies (e.g., China, Mongolia, Bangladesh, Malaysia, Egypt, and EU) take into account Nationally Determined Contributions (NDCs), national plans and policies for environmental action, as well as national norms and standards.
For the technical screening criteria, the Indian taxonomy must rely on pollution standards set by the Central Pollution Control Board (CPCB) under the Ministry of Environment, Forests & Climate Change (MOEF&CC); water consumption norms set by the MOEF&CC and Ministry of Jal Shakti; and the Environmental Impact Assessment (EIA) protocol defined by the MOEF&CC. The monetary valuation of ecosystem services may also be used for assessing ecosystem and biodiversity losses.
Principle 4: The eligibility criteria must be technology agnostic and 1.5°C-compatible.
Unlike the taxonomies of Bangladesh, Malaysia and China, India’s own must establish screening criteria for determining eligibility for green finance. Akin to the EU taxonomy, the Indian version must be technology agnostic. Such a taxonomy provides the freedom to choose between alternative pathways to green transition and prevents it from being redundant amidst technological innovations.
Like the Climate Bonds Initiative (CBI) taxonomy, India’s must use the latest climate science for its technical screening criteria relating to GHG emission thresholds. The criteria should be consistent with 1.5°C, rather than 2°C.
Principle 5: The taxonomy should be harmonised with international standards.
Existing Indian standards may be revised to be at par with international benchmarks within the scope provided by domestic circumstances. For example, unjustifiable exemptions, standardised terms of reference, standard questionnaire for the public hearing process, and introduction of “deemed” clearance have compromised the authenticity of the EIA protocol. While attempting an overhaul of this protocol, it may be augmented by including Cumulative Impact Assessment in line with the International Finance Corporation (IFC) Performance Standard 1: Assessment and Management of Environmental and Social Risks.
Principle 6: Alignment of tracking of green finance and disclosure norms with the taxonomy.
The MDB-IDFC Principles, and the taxonomies of Malaysia, Egypt, and the EU, highlight the need for tracking climate/green finance through transparent and well-defined disclosures and reporting.
Regulators such as the RBI and SEBI should mandate financial market participants to delineate the environmental goals met by underlying investments for each financial instrument (i.e., bonds, equity, and loans), and the proportion of such investments that are taxonomy-aligned, expressed as a percentage of the investment into an instrument, fund, or portfolio. The Ministry of Corporate Affairs must mandate companies to disclose the proportion of their revenues and turnover as well as capital and operational expenditures aligned with the taxonomy, disaggregated by economic activity, and enlist the environmental objectives achieved by economic activities.
Principle 7: Regular reviews and updates of the taxonomy.
The Mongolia, China, and CBI taxonomies underscore the importance of timely updates to incorporate changes in development levels, technology, policy, standards and environmental conditions. This principle must be included in the Indian taxonomy.
Owing to the heterogenous nature of farms and the lack of feasibility of tracking GHG emission, air and water pollutants as well as water consumption at the farm level, the taxonomy may include a pre-specified set of sustainable agricultural and livestock farming practices suitable for the Indian context, as opposed to quantitative technical screening criteria. Sustainable agricultural practices include organic farming, agroforestry, natural farming, System of Rice Intensification (SRI), and precision farming. Sustainable livestock farming practices include better pasture management, improvement in animal nutrition and genetics, improved manure management, fertiliser management, and animal health planning. The MOEF&CC, Ministry of Agriculture & Farmers Welfare, and Ministry of Fisheries, Animal Husbandry & Dairying should task the Indian Council of Agricultural Research (ICAR) to conduct research for finding substantial, reliable and robust evidence in favour of sustainable agricultural and livestock farming practices. Such research would also delineate a set of essential practices which, when deployed collectively, will yield appreciable environmental gains across various biophysical conditions in India.
Sustainable livestock farming practices include better pasture management, improvement in animal nutrition and genetics, improved manure management, fertiliser management, and animal health planning.
The culture of poor compliance across sectors exposes the implementation of the taxonomy to the risk of “greenwashing”. Violation of industrial pollution norms and the EIA protocol can be remedied by setting up incentive-compatible mechanisms of compliance. Minimising greenwashing in the transport sector, for example, would require replacing chassis dynamometer and Constant Speed Fuel Consumption (CSFC) tests with engine dynamometer tests in verifying compliance with CO2 emissions thresholds. It also necessitates a gradual phasing out of preferential treatment to electric vehicles in such verification, delinking of financial incentives of type approval and Conformity of Production (COP) testing agencies from vehicle manufacturers’ need to demonstrate compliance, and establishing the carbon-neutrality of bio-fuels before including activities related to such fuels in the taxonomy.
The introduction of a national taxonomy will display India’s aspiration of ramping up its contribution to the global net-zero vision. At present, green finance in India is still a “cottage industry”. Articulating a taxonomy will help “industrialise” green finance, transforming it “from a trickle to a flow” which will in turn influence India’s ambitious green transition.
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Renita DSouza is a PhD in Economics and was a Fellow at Observer Research Foundation Mumbai under the Inclusive Growth and SDGs programme. Her research ...
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