The New Geography of Taxonomies
Updated in August 2023
In the field of sustainable finance, guidelines and standards are the bedrock of product design and market integrity. Private investing and funding strategies need anchoring definitions and undisputed criteria. It holds true as well for governments in their attempts to greening their interventions or spending. In order to introduce environmental caveats into stimulus packages, subsidies or tax systems, policy makers need a common understanding of what is unquestionably (or at least consensually) sustainable.
Taxonomies of sustainable activities are the linchpin of sustainable finance and aim at providing clarity and standardization to market participants. A sustainable finance Taxonomy is a classification tool. Taxonomies serve as a technical guidance and disclosure yardstick. To live by the double materiality of climate change and of broader ESG issues, financial decisions must be performed with a limpid knowledge of the economic activities deemed to deliver either a positive or negative contribution on the fulfillment environmental or social objectives.
Various authorities have taken up the challenge of developing Taxonomies, which are often straightforwardly linked to Green Bonds. A global standard setting-race has begun as more than twenty classifications are either announced, under development or adopted worldwide. Taxonomies mostly address climate change (16), but other environmental or even social themes are increasingly addressed. So-called transition Taxonomies (3), but also social or SDG-related ones (2) are in the making. Articulating them is not an easy task for both policy-makers and Taxonomies recipients and users. There are spillovers between them. For example, the strictest and most used a green Taxonomy is, the higher the needs for fair transition financing and criteria become.
The proliferation of Taxonomies announcements can lead to misunderstandings and/or lack of predictability on Taxonomy development stages, consequences, and opportunities. The present study is designed as a “toolbox” to understand what sustainable Taxonomies entail, and how to handle them. It is built upon a benchmark of more than 20 existing and under development sustainable finance Taxonomies worldwide and offers perspectives on their development trends (dissemination, standardization, competition).
We benchmarked Taxonomies using our own analysis grid. The six criteria selected are: the progress status (life stage); the explicit goals and purposes (use-cases); the sustainability objectives addressed; the sectorial coverage; and the typology of criteria (incl. ESG negative screening criteria).
This report ought to be of a practical use for recipients and practioners of Taxonomies (i.e., corporates, financial institutions), but also public authorities that are looking to develop and refine sustainable finance Taxonomies.
EU-CHINA COMMON GROUND TAXONOMY