In the global pursuit of combating climate change and fostering a sustainable future, redirecting investments towards environmentally friendly initiatives is paramount. However, ensuring that these investments genuinely contribute to environmental goals presents a significant challenge. This is where Green Taxonomies step in. Green Taxonomy is a classification system that provide criteria for determining whether economic activities are environmentally sustainable.
Green Taxonomies offer several benefits. Firstly, they combat greenwashing by distinguishing genuine sustainable investments from exaggerated or misleading claims. Secondly, they guide investors by providing clear criteria, enabling them to make informed decisions about where to allocate their funds. Lastly, by reducing uncertainty and risk, they unlock sustainable investment opportunities, encouraging more funding for projects and technologies that contribute to a greener future.
This win-win scenario benefits both investors and the environment. Investors gain access to a broader array of trustworthy sustainable investment prospects, ensuring their funds make a positive impact on environmental goals. Meanwhile, businesses can attract investment for their sustainable initiatives, enhancing their environmental performance while securing financial support. In this scenario, the environment emerges as the ultimate beneficiary as resources are directed towards activities fostering a sustainable future.
Green Taxonomies are evolving, with various countries and regions developing their own frameworks. The European Union (EU) is at the forefront with its comprehensive EU Taxonomy for Sustainable Activities. The EU Taxonomy regulation provides a framework for classifying “green” or “sustainable” economic activities within the EU. It focuses on six environmental objectives as per below picture. For a company to be classified as sustainable according to the EU Taxonomy, it must contribute to at least one of these objectives without violating the others. For example, an activity aimed at mitigating climate change that also negatively impacts biodiversity cannot be considered sustainable. Through EU Taxonomy, European Commission plans to reduce Greenhouse Gas emissions at least 55% by 2030 compared to 1990 levels, and no net emissions of greenhouse by 2050.
In addition, ESG (Environmental, Social, and Governance) criteria and Green Taxonomies complement each other in sustainable finance. While ESG evaluates a company’s sustainability broadly, Green Taxonomies focus mainly on environmental impact, determining which activities are genuinely beneficial for the planet.
Focusing on Pakistan, the country urgently needs to shift towards a more sustainable economy given the looming threat of climate change. Green investments are crucial for building resilience and mitigating environmental harm, making Green Taxonomy invaluable. By establishing a clear national Green Taxonomy, Pakistan can attract international investors interested in sustainable projects, unlock vital funding for renewable energy, clean technologies, and climate-resilient infrastructure.
Pakistan is in the early stages of developing a Green Taxonomy, which marks a positive stride towards sustainability. Green taxonomy can position Pakistan as a regional leader in sustainable development, attracting green investments and empowering local businesses to contribute to a greener future. Strengthening Pakistan’s existing green banking policies by aligning them with the green taxonomy framework and leveraging it to attract climate finance for adaptation and mitigation efforts are also critical considerations. Green Taxonomies are crucial for aligning financial and economic activities with sustainability goals, facilitating the transition to a greener economy, and achieving international environmental targets like the Paris Agreement.
The writer is the Group Head (Administration, IT, Engineering Projects & BCP) and look after Green Banking as well at Bank AL Habib Limited, Pakistan. He has more than 23 years of managerial experience in a number of reputed national and international organizations. He can be reached at ali.ashar@bankalhabib.com.
