[Manvi Khanna is a Research Fellow at Vidhi Centre for Legal Policy and Hitoishi Sarkar a fifth-year law student at Gujarat National Law University.
This post first appeared as an article in the Deccan Herald]
The G20’s Sustainable Finance Working Group’s recent emphasis on the need to establish a green finance ecosystem has brought to the limelight the challenges that impede India’s green finance efforts. A crucial component of a credible green finance ecosystem is a shared understanding of what constitutes ‘green’, attainable through a green taxonomy that aligns with international standards. As India takes on the G20 presidency with climate change as a key agenda item, it has a valuable opportunity to advance global sustainability initiatives by fostering an international consensus on what qualifies as ‘green’. This shared understanding would curb information asymmetry and prevent greenwashing while directing capital towards truly green financial activities. Additionally, it would provide a standardised approach for financial institutions, regulators, companies, investors, and policymakers to identify, develop, and finance green projects, thus facilitating India’s green finance efforts. This post outlines India’s efforts so far in formulating a green taxonomy and offers policymakers insights on charting a future course for India’s green taxonomy.
India’s efforts so far in developing a green taxonomy
While India’s green taxonomy is still a work in progress, notable strides have been made by financial sector regulators such as the Securities Exchange Board of India (‘SEBI’), the Reserve Bank of India (‘RBI’) and the International Financial Services Centres Authority (‘IFSCA’) in promoting green finance. In 2017, SEBI formalised the disclosure requirements for the issuance and listing of green debt securities in its attempt to fillip sustainable finance in India. It defined broad areas where funds may be allocated to qualify a debt security as green, including renewable energy and clean transportation. This was later subsumed into the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and the definition expanded this year to include blue bonds, yellow bonds and transition bonds as subcategories of green debt securities.
The absence of a green taxonomy regarding assets to be financed through green bonds and the potential harm of greenwashing posed by it was specifically highlighted in the SEBI Consultation Paper on ‘Green and Blue Bonds as a mode of Sustainable Finance’. Additionally, it highlighted the reluctance amongst bankers and lenders in financing green bonds as well as issuers of green bonds due to the lack of domestic green assessment criteria. SEBI has also made attempts to improve sustainability reporting in India. In terms of disclosure requirements, in 2021, SEBI introduced the more comprehensive Business Responsibility and Sustainability Reporting Framework, which contains principle-wise detailed environmental, social and governance disclosures that apply to the top thousand listed companies, including banking companies.
India’s central bank, the RBI, has also echoed the critical need for a green taxonomy. In 2022, it released a Discussion Paper on Climate Risk and Sustainable Finance, providing entities regulated by it with broad guidance on how their governance arrangements, strategies and risk management structures need to be recalibrated to account for climate risks. Tasked with addressing greenwashing concerns without an official green taxonomy, the RBI recently released a Framework for acceptance of Green Deposits which mandates regulated entities to formulate a comprehensive Board-approved policy on green deposits. Interestingly, much like SEBI, the RBI has also stuck with an approach of providing broad categories of activities for which allocation of proceeds raised from green deposits may be utilised until an official green taxonomy is finalised.
As a financial regulator located at GIFT City in Gujarat, the IFSCA also has been actively pursuing its goal to establish itself as a global hub for green finance. In April 2022, it released the Guidance framework on sustainable and sustainability-linked lending by financial institutions, which mandates banking units and financial companies in the IFSC to have a board-approved policy on green and sustainable lending. The framework provides an indicative list of eligible green categories for green lending, providing clarity and direction to the financial institutions at various stages of the life cycle of lending. In October 2022, the IFSC Expert Committee on Sustainable Finance recommended developing an internationally aligned taxonomy to attract foreign investors by exploring existing global taxonomies and developing common ground between the Indian and international green taxonomy.
From the above, it is clear that although financial sector regulators have made some efforts to define ‘green’, the approach by far has led to fragmentation and lack of standardisation. To remedy this, the Department of Economic Affairs set up a Task Force on Sustainable Finance in 2021, which submitted a draft taxonomy. However, there is limited information available in the public domain on the current status of finalising this taxonomy.
India’s G20 presidency presents an opportunity to reinvigorate deliberations for developing a shared understanding of what constitutes ‘green’ and ensuring increased interoperability in the development of a green taxonomy as many countries look to finalise their taxonomies. The Association of Southeast Asian Nations (‘ASEAN’) member states’ considerable success in formulating a taxonomy that serves as a common language across the ASEAN jurisdictions to communicate and coordinate on labelling for economic activities and financial instruments can serve as a valuable reference point in this regard.
In developing a green taxonomy, policymakers in India could adopt a more pragmatic approach similar to that of the EU taxonomy to mitigate the risk of fragmentation and inconsistency. Rather than waiting for a comprehensive taxonomy to be developed, an ex-ante classification that applies across all financial sectors, complemented with detailed prescriptions for high-risk sectors should be considered. Taxonomies such as those of the EU and South Africa go a step ahead and highlight the need for a technical screening criterion for certain high-risk sectors, such as infrastructure and transport, which take into account the unique factors that affect those sectors. Providing interpretative assistance, such as comprehensive FAQs regarding the taxonomy’s scope and engaging continuously with the industry stakeholders, would be key to incentivising the adoption and the effectiveness of such a taxonomy.
Sustainable development relies on timely action and the delay in formulating a green taxonomy puts India at risk of missing out on substantial green capital. Therefore, India must accelerate its green growth across sectors by crafting its own locally sensitive green taxonomy that strikes a delicate balance between its economic goals and environmental responsibilities, without further ado.
– Manvi Khanna & Hitoishi Sarkar