Guiding climate investments – Newspaper

THE State Bank of Pakistan (SBP) has just released the draft Pakistan Green Taxonomy 2025, soliciting stakeholder comments. It is an important building block for shaping the nation’s financial architecture to address the climate crisis. It will facilitate transformative investments while recognising the complexities faced by our investment-hungry economy. By balancing environmental standards and domestic development priorities, the Taxonomy is expected to offer practical guidance for directing capital towards climate-resilient growth.

This framework will help mobilise an estimated $348 billion needed by 2030 for climate response, while providing guidance for sustainable investments across key economic sectors. The Taxonomy establishes seven environmental objectives: climate mitigation, adaptation, sustainable water use, ecosystem protection, pollution prevention, circular economy promotion, and sustainable land management. The initial focus will, however, be on climate mitigation and adaptation.

The draft provides varying levels of detail across economic sectors. Energy and manufacturing feature comprehensive technical screening criteria, with emission thresholds and renewable energy priorities. The chemicals, cement, steel, and textiles industries are addressed. Transportation emphasises zero-emission vehicles and sustainable infrastructure, while construction incorporates energy-efficiency needs.

A three-tier system: The proposed Taxonomy has adopted a traffic light system: green for activities that substantially contribute to environmental aims, amber for transition activities that do not fully meet green criteria, and red for activities causing significant harm.

The ‘Taxonomy’ will help mobilise the estimated $348bn needed for climate response.

This system differs from major international taxonomies to offer greater manoeuvrability. Similar taxonomies of the EU, South Africa, and China have opted for a binary approach where activities are either taxonomy ‘aligned’ or ‘not aligned’ — they focus on creating explicit thresholds to avoid grey areas that can invite controversy. Our framework is guided by the ‘do-no-significant-harm’ principle, which ensures that activities benefiting one objective don’t damage others, and social safeguards requiring minimum social standards compliance.

Strategic positioning: A hybrid approach draws elements from both the EU and Chinese taxonomies while adapting to local conditions. It provides varying levels of detail across sectors, with comprehensive coverage in energy and manufacturing, while others have to await further development. This model has left the door open to suit our developmental stage and immediate financial imperatives. Pakistan’s framework positions itself between these approaches, incorporating environmental considerations, where feasible, while maintaining Chinese-inspired flexibility for development needs.

International standards: The Taxonomy has incorporated IFC Performance Standards, providing for environmental and social safeguards. However, the framework could benefit from stronger alignment with broader international sustainable finance frameworks, including explicit references to IMF’s climate risk assessment guidelines and the World Bank’s sustainable finance principles, harmonised with ADB and other MDBs. Likewise, cross-referencing is desirable with ILO and other standards.

Alignment with climate policies: The Taxonomy requires stronger integration with our climate po­­licy landscape. While it references the Paris Agre­ement, it needs to acknowledge integration and subservience through explicit linkages with our NDC targets, the National Climate Change Policy, the National Adaptation Plan, and the National Cli­­mate Finance Strategy. This hierarchy is essential for effective implementation. Both the natio­nal and provincial climate change funds need well-defined roles, while the Planning Commis­sion’s Development Manual and project planning templates should incorporate taxonomy needs.

Institutional responsibilities: The implementation structure, led by SBP, has involved multiple government agencies and technical working groups. However, institutional responsibilities, monitoring mechanisms, and provincial coordination protocols should be clearly delineated.

Trade implications: The approach to international alignment requires careful consideration as exporters here face sustainability requirements. The commerce ministry and the Trade Development Authority of Pakistan need to help navigate the EU’s Carbon Border Adjustment Mechanism, particularly for textiles, cement, and chemicals. The FPCCI has stressed stronger alignment with EU sustainability criteria for maintaining our GSP-Plus status. A deeper alignment with EU criteria would better secure Pakistan’s preferential trade position.

Governance structure: Post-18th Amendment, the framework would have benefited from formal provincial endorsements and coordination protocols. Despite wide-ranging engagement with provincial representatives, it is unclear if the Taxonomy enjoys uninhibited support by industries, sectors, and all provinces. Hence, formal approval through forums like the CCI or the Pakistan Climate Change Council is essential for nationwide implementation.

Stakeholder engagement requires a boost. While some industry participation exists, the framework would benefit from broader representation, particularly of the directly affected sectors. Industry associations could provide practical insights, helping bridge the gap between policy design and real-world application. Their experience would be invaluable for refining sector-specific criteria and developing practical monitoring mechanisms.

Way forward: Success requires addressing several challenges. SBP’s Sustainable Finance Department needs expanded capacity for comprehensive oversight, while banks will require detailed guidance for assessing Taxonomy-aligned investments. The SECP will need to develop specific reporting requirements for listed companies and provincial environmental protection agencies to strengthen their monitoring capabilities.

Several strategic enhancements emerge as priorities. First, SBP should establish a dedicated ‘Sustainable Finance Implementation Unit’ with clear authority and oversight capabilities. This should be complemented by the climate change ministry developing detailed guidelines that link Taxonomy criteria to national climate targets. Provincial planning and development departments need formal mechanisms for incorporating requirements into development projects.

The Taxonomy’s evolution requires sustained stakeholder engagement and regular updates to reflect technological advances and market developments. Financial institutions need capacity-building support, while industry associations require implementation toolkits. Through all this, the Taxonomy can hopefully help mobilise the estimated $348bn, while maintaining our international trade competitiveness and supporting sustainable economic growth.

The writer is an Islamabad-based climate change and sustainable development expert.

Published in Dawn, February 27th, 2025