The words of Benjamin Franklin “By failing to prepare, you are preparing to fail” rings true when looking at Pakistan’s climate change adaptation and mitigation roadmap.
Pakistan has been securing a position among the top ten countries most vulnerable to climate change for the last many years. However, Pakistan has not yet established a national green taxonomy that corresponds with the country’s urgent climate priorities. In Pakistan, there is an increasing demand for clarity regarding which activities fall under the scope of climate transition.
A taxonomy is a classification scheme and is broader than a definition. A Green Taxonomy serves as the basic roadmap for an economy’s green transformation. It provides a list of economic activities that are considered environmentally sustainable for investment purposes. Such a framework directs the climate investment community in accurately classifying green initiatives. In the absence of a standardized language and framework that identifies and classifies activities and assets that are environmentally sustainable, the green initiatives by various economic sectors will not be synergistic.
A taxonomy in green and sustainable finance serves as a classification framework that facilitates the identification and categorization of investments as green, contingent upon their conformity with designated environmental goals and targets.
These green taxonomies may encompass a diverse array of objectives, including climate mitigation, adaptation, water management, circular economy initiatives, pollution control, and biodiversity preservation. Furthermore, they differ across nations, reflecting the distinct economic, social, and environmental challenges each country faces. It is important to note that a taxonomy is not an end in itself; rather, it functions as a mechanism to guide the allocation of capital towards green and sustainable projects that align with environmental aspirations.
The banking industry in Pakistan has come a long way in terms of the development of a green and sustainable financing portfolio.
In recent years, investors have to an increasing extent taken actions to integrate climate change and broader sustainability concerns into their investment decisions and portfolio allocations. Diverse financial market actors have engaged in a broad range of sustainability-related initiatives within various contexts and with diverse objectives. As a result, there are many different understandings of which investments are sustainable.
There are different types of taxonomies including public, private, and hybrid taxonomies. Public taxonomies are developed by governmental or public entities and are generally mandatory. Private taxonomies are created by the private sector and are typically voluntary. Hybrid taxonomies integrate aspects from both public and private taxonomies. Nonetheless, the driving force behind them may originate from either the public or private sector.
A preliminary instance of a green taxonomy was created in 2012, aimed at facilitating the issuance of climate bonds, with the stipulation that the generated funds be allocated to green initiatives. This framework served as a prototype for the Chinese taxonomy, which has subsequently influenced the European taxonomy.
The EU Taxonomy was officially adopted in July 2020 and requires undertakings to disclose the proportion of their activities that are taxonomy-eligible. Mongolia is among the early developers of SDG finance taxonomy. Several other countries including Bangladesh, Indonesia, Russia, Malaysia, Kazakhstan, Republic of Korea, Georgia and Sri Lanka have adopted a green or similar taxonomy to guide investments. Pakistan is lagging behind other countries when it comes to the development of a green taxonomy.
The development of a green taxonomy by Pakistan is urgently required and it is currently one of the key obstacles in the country’s road to sustainable development. The banking industry in Pakistan has come a long way in terms of the development of a green and sustainable financing portfolio. However, in the absence of a green taxonomy or similar green classification system, the majority of the green financing projects are not being reported under the green banking or green business facilitation category.
Implementation and disclosure of green initiatives categorized according to a green taxonomy can significantly improve Pakistan’s UN-SDGs adoption status and carbon market potential.
Pakistan’s green taxonomy will facilitate the development of a strong and dependable green finance market in the country along with aiding in shaping policies and regulations, including those related to taxonomy-aligned disclosure requirements. Furthermore, it will offer a systematic framework for banks and other financial institutions to recognize, assess, and advocate for green initiatives.
Additionally, it will allow for the identification and monitoring of climate financing flows. Green disclosure is also based on the presence of a green taxonomy in the country. Currently, there are no mandatory disclosure requirements for financial and non-financial institutions to ensure data availability across the economy.
The establishment of a green taxonomy will facilitate the creation of awareness, resulting in enhanced institutional capacity and expertise to recognize activities that achieve environmental and sustainability goals. A green taxonomy improves access to funding from international climate funds and promotes public-private partnerships, thereby facilitating collaboration and innovation aimed at achieving a net-zero future. It will serve as a crucial tool in unlocking the trillions of dollars required to realize this goal.
A comprehensive national green taxonomy should be collaboratively established by regulatory authorities within the financial sector, in close partnership with national entities tasked with outlining the country’s sustainable development goals and priorities.
Additionally, collaboration with national bodies dedicated to fostering environmental protection and climate initiatives is essential. It is imperative to engage climate, environmental, and energy scientists, along with sector-specific technical experts, from the outset of this process.
Furthermore, it is strongly advised to consult stakeholders across all sectors, including large corporations, SMEs, and financial service providers. The active involvement and contributions of relevant stakeholders are vital for the development of a robust green taxonomy.
The writers Dr Syed Asim Ali Bukhari is working as SVP/Head – ESG in The Bank of Punjab and Dr Syeda Nazish Zahra Bukhari is working as Assistant Professor in University of the Punjab.