India's Sustainable Taxonomy
Chandni Khosla
Driving bottom-line growth through Impact, Sustainable & Climate Strategies
As India strives to reach the milestone of a $5-trillion economy in the next five years, it becomes imperative to lay a solid foundation of robust governance to instill confidence among its stakeholders. As corporate India aspires to achieve sustainable growth, both in financial terms and, ideally, beyond, it is essential for the policy framework to align with these aspirations.
India is the world's second-most populous nation, the fastest-growing economy globally, and the third-largest emitter of carbon. With the recent announcement of the 2024 interim budget, aiming to ascend to the top three economic superpowers, it is crucial that sincere efforts, resources, and intellectual capacity are directed toward ensuring that our pursuit of economic superpower status is accompanied by significant reductions in carbon emissions. The challenge lies in achieving this while also safeguarding principles of social justice.
On a broader philosophical level, we must question the conventional definition of economic growth, especially for a nation that is depleting its natural resources at a rate far exceeding replenishment. Importing all our necessities is not a viable solution, primarily due to two critical factors. First, it raises concerns about our currency, and fiscal considerations. Second, it's essential to acknowledge that the commodities race globally is unaffordable and unsustainable.
At the governmental level, circularity need to become a national and state-level priority agenda that is woven into the sustainable financing framework and the overall design of the sustainable economy. Consider the European Union's taxonomy, which sets criteria for determining environmental sustainability across various objectives. India's pursuit of net-zero ambitions can gain significant momentum by developing a roadmap for a sustainable taxonomy that encompasses the entire economic system.
Recent updates indicate that 29 sustainable finance taxonomies have been introduced or are in development worldwide. Indian policymakers can draw inspiration and context from these global taxonomies to tailor one that aligns with domestic realities, national commitments, and legal standards.
There is no doubt that Indian policy makers would aim for a Sustainable taxonomy that establish appropriate screening criteria to reflect domestic realities, commitments towards the NDCs and align with national laws and standards, that said, the development of India’s Sustainable taxonomy could consider establishing a compatible and interoperable framework on sustainable finance not only at a regional level but also globally that will facilitate access to cross-border financial markets for such investments and will avoid information asymmetry and market fragmentation, which are among the main barriers to be overcome for increasing market uptake on sustainable finance
The International Platform for Sustainable Finance (IPSF) plays a crucial role in promoting interoperable taxonomies and advancing towards standardization. IPSF faces the challenge of establishing a principles-based framework that assesses equivalence among jurisdictions developing their taxonomies.
There are many merits in establishing a sustainable taxonomy, it enables redirecting of capital from high-carbon sectors and non-transitioning companies to sustainable avenues. A sustainable taxonomy offers a nuanced approach for risk and opportunity discovery within sectors through the mechanism of "shades of green" traffic light signals and key performance indicators (KPIs) for capital and operational expenditures (CapEx and OpEx).
The articulation of a sustainable taxonomy is not just about harmonizing interpretations but also about creating a robust system for monitoring, tracking, and reporting sustainable finance at different levels, from individual projects to funders, companies, and countries to increase stakeholder confidence.
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Recognizing India's need for international capital, an interoperable taxonomy framework would provide a transparent, reliable, and credible pathway for long-term capital inflows, benefiting the nation's economic growth while addressing environmental concerns.
Notable references:
Nirmala Sitharaman Reserve Bank of India (RBI) SEBI Ministry Of Corporate Affairs Narendra Modi Observer Research Foundation Shakti Foundation India United Nations Environment Programme Finance Initiative (UNEP FI) Network for Greening the Financial System (NGFS) FICCI Confederation of Indian Industry Synergos Consulting