Hopes for a net-zero future hinge on raising enough green finance. There are promising signs, particularly in emerging markets, where the issuance of bonds linked to environmental, social, and governance (ESG) criteria climbed from $66 billion in 2020 to almost $200 billion in 2021. Green bonds are a popular ESG instrument in Asia and the Pacific, with issuance reaching $110 billion in 2022 and on track to rise further this year. But overall climate finance needs are far greater. The McKinsey Global Institute has put the annual price tag for the world to achieve net zero by 2050 at an eye-watering $9.2 trillion.
Trillions could be raised by tapping the private sector's vast resources, but efforts to ramp up green finance are often hampered by a lack of clear, precise, internationally agreed-upon definitions on which uses of financing should be considered green and which should not. Such categorization systems are known as taxonomies.
A common green taxonomy for Asia and the Pacific is a key missing piece in addressing the region's climate finance needs. The existence of one would help unleash the full potential of sustainable credit and investment and bring greater transparency, uniformity, and reliability to climate finance instruments. It would also discourage the practice of greenwashing, the overpromising of green benefits.
In comparison with other emerging regions, Asian governments have made significant progress on green taxonomies. Since 2015, several countries have published national taxonomies, including China, Bangladesh, Mongolia, Indonesia, Kazakhstan, Malaysia, Sri Lanka and South Korea, with more expected.
While this is encouraging, a proliferation of separate national green taxonomies and sustainable finance standards can create confusion and impose heavy compliance burdens on governments, businesses, and investors. The financial and opportunity costs created by inconsistent definitions and reporting requirements and separate local regulatory frameworks can deter investors and weaken efforts to raise green finance.
By contrast, the European Union's taxonomy for sustainable finance, adopted in 2020, covers 27 countries. A consistent taxonomy across borders facilitates the identification of green finance opportunities in different countries, enhances market efficiency, and reduces uncertainty and compliance costs across jurisdictions.
A common taxonomy also enables investors and issuers to make better comparisons of an investment's contribution to environmental public goods such as climate change mitigation and adaptation, the sustainable use of natural resources, pollution prevention, or biodiversity protection. Streamlining green finance taxonomies and standards takes time, but that is what we do not have.
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