Context
A taxonomy is a classification system that categorises items based on specific criteria. A taxonomy of sustainable activities specifies a list of activities deemed sustainable based on defined eligibility criteria. Sustainability in this context is usually defined as environmental sustainability; however, it is also possible to include broader developmental considerations in the definition of sustainability1. A taxonomy of sustainable activities provides a clear framework for all stakeholders, such as investors, firms, and policymakers, to better identify and promote investments towards activities that contribute to specified sustainability objectives.2
The need for a taxonomy
A taxonomy of sustainable activities is a regulatory tool that can help realise several objectives.
Clarity and consistency: It specifies clear criteria that ensure that all stakeholders have a common understanding of what is “sustainable” or “green” (as applicable). It can therefore help reduce the incidence of greenwashing.
Facilitates the flow of capital: By enhancing transparency, the taxonomy can enable the identification of a credible pipeline of projects. It therefore allows investors to make informed decisions and facilitates the flow of capital towards projects that promote sustainability.
Policy alignment: It provides a basis for designing policy and regulatory incentives to advance sustainable activities. At the same time, the taxonomy can help align regulatory and policy measures with larger national/regional sustainability goals.
Major taxonomies around the world
Some examples of taxonomies from other jurisdictions are national-level taxonomies such as China’s Green Bond Endorsed Project Catalogue, cross-country taxonomies such as the ASEAN and EU taxonomies, as well as market-led initiatives such as the taxonomy developed by the Climate Bonds Initiative (CBI).
Figure 1: Timeline of key taxonomy-related events globally and nationally
Source: CEEW-CEF analysis
Key elements of a sound taxonomy
While designing taxonomies, it is important to consider the inclusion of the following features:3
Objectives: Taxonomy development should be guided by well-defined sustainability criteria. Further, these should be aligned with science-based national/regional high-level sustainability goals. For example, the EU taxonomy is aligned with the EU 2050 net-zero targets.
Scope/coverage: Scope refers to the list of activities within specific sectors and sub-sectors that a taxonomy covers. Most taxonomies use existing sectoral classification systems to identify these activities, such as industrial classification codes.
Screening criteria: Screening criteria or technical screening criteria refer to rules or metrics that determine which activities qualify as sustainable.4 Quantitative criteria can enhance transparency and provide greater specificity to the taxonomic classification.
Interoperability: Compliance with multiple disparate taxonomies can be costly and time-consuming for investors and disincentives the cross-border flow of capital. Ensuring international interoperability can facilitate the participation of global investors.
Who should care?
- Central banks and other financial regulators
- Banks and financial institutions
- Investors
References
[1] BIS. 2021. “A Taxonomy of Sustainable Finance Taxonomies.” Bank for International Settlements. https://www.bis.org/publ/bppdf/bispap118.pdf.
[2] UNESCAP. n.d. “Green Taxonomy.” Economic and Social Commission for Asia and the Pacific. https://www.unescap.org/sites/default/d8files/event-documents/Session4_Green%20Taxonomy.pdf
[3] Martin, Patrick John, and Anant Jha. 2023. “What Characterises a Good Green or Sustainable Finance Taxonomy?” MPFD Policy Brief, No. 126. Economic and Social Commission for Asia and the Pacific. ESCAP-2023-PB-What-characterises-good-green-sustainable-finance-taxonomy.pdf.
[4] S&P Global. 2021. “A Short Guide to the EU’s Taxonomy Regulation.” https://www.spglobal.com/esg/insights/a-short-guide-to-the-eu-s-taxonomy-regulation.
