THE World Bank estimates our climate finance needs at $348 billion up to 2030. To promote green finance, the State Bank of Pakistan has released its draft National Green Taxonomy for public consultation this month. The document aims to guide potential investors regarding which ‘green’ activities are eligible for climate finance.

The activities defined come under climate change mitigation, climate change adaptation, and multiple objectives. The first focuses on sectors like manufacturing, transport, energy, construction, water and waste management, ICT, and tourism. The second focuses on sectors such as disaster risk management and urban resilience. Agriculture, livestock, forestry, and fishing are part of the multiple environmental objectives.

Rigorous screening criteria determines if an activity is environmentally sustainable. Activities must also meet the ‘do-no-significant-harm criteria’ and follow social safeguards. Mitigation sectors have green, amber, and red activities. A traffic light system is used for classification: green activities are near-zero emissions or on a 1.5 degrees Celsius-aligned pathway; amber signifies a green transition pathway; while red activities aren’t eligible. Classification of adaptation activities are based on their contribution to climate adaptation goals and follow a case-wise approach.

The draft encourages decarbonisation of high-emission sectors crucial to the economy, guiding capital towards activities that reduce carbon emissions while supporting economic growth. It sets emission limits for the chemical, cement, iron, steel, aluminium, plastic, and textile industries. It mandates zero direct emissions for public transport, micro-mobility, inter-urban and sea transportation. It imposes stringent emission limits on geothermal, bioenergy, and hydrogen production, and the transmission and distribution infrastructure.

SBP has taken a positive step towards green activities.

The Taxonomy promotes the use of recycled materials, such as scrap steel, recycled aluminium, and textile fibres. Material recovery facilities are incentivised to convert at least 50 per cent of collected materials into secondary raw materials. Climate-mitigation technologies such as battery production, renewable energy, EVs, and energy-efficient building equipment are also classified as green.

In the Taxonomy, water-related adaptation activities focus on reducing water consumption and enhancing ecosystem health. Nature-based solutions such as wetland restoration, watershed conservation, forest cover enhancement, and water quality monitoring, are also promoted for long-term water security.

The Taxonomy stresses infrastructure resilience and effective early warning systems for disaster risk management. These include flood-prevention infrastructure, re­­mote sensing for glacier monitoring, hydrological modelling to predict floods, and telecom, power, and transport systems.

Urban resilience activities aim to boost climate resilience of transportation systems and buildings and reinforce coastal protection structures. Urban initiatives also include expanding green spaces to reduce heat and improve drainage systems.

The Taxonomy also identifies projects meeting multiple green goals, including biotechnology, and agri-technologies that enhance productivity while minimising the environmental impact. Other cross-cutting activities promote resource efficiency while reducing GHG emissions such as the use of renewable energy-powered farm equipment. In the livestock sector, practices like organic manure usage, and improved livestock breeds are encouraged to enhance sustainability.

The draft encourages sustainable forest management practices that enhance ecosystem re­­silience and support climate adaptation. Agro­forestry — combining timber and fruit trees with seasonal crops — diversifies income and improves soil health. Non-timber forest products and bio-business development are en­­co­uraged to create economic opportunities while conserving forests.

The draft is a significant step towards mobilising the transition to a green economy. However, it remains to be seen whether our financial ecosystem is ready to invest in such green initiatives. Without substantial financial backing and speedy deployment of innovative financial instruments such as green bonds, climate insurance and green venture capital, these activities will remain theoretical.

For successful implementation, our financial institutions will need extensive capacity building and robust policy support. A strong effort from the public and private sectors is needed for an enabling environment that encourages investment in green initiatives. Public-private partnerships can play a critical role in driving investment, building capacities, and facilitating the transfer of technology and knowledge towards a sustainable economy.

The writers have expertise in climate finance and sustainability.

Published in Dawn, February 26th, 2025