By Hanh Le | 15 March 2023

What is sustainable finance taxonomy?

A sustainable finance taxonomy is a system that identifies, categorizes, and classifies economic activities and investments that are considered environmentally sustainable. The taxonomy provides a framework for defining what constitutes a “green” activity or investment by specifying the environmental objectives, criteria, and thresholds that must be met.

The goal of a green finance taxonomy is to promote sustainable finance by providing a standardized and transparent method for investors, issuers, and regulators to identify environmentally sustainable activities and investments. This enables investors to make informed decisions about the environmental impact of their investments and encourages issuers to finance environmentally sustainable projects.

The taxonomy typically includes a classification system based on the environmental impact of the activity or investment, such as greenhouse gas emissions, water use, land use, and waste generation. It may also take into account the potential positive impact of the activity or investment, such as renewable energy generation, energy efficiency, or sustainable land use.

Examples of sustainable finance taxonomies around the world

Several countries and regions have developed their own green finance taxonomies to promote sustainable finance and facilitate the transition to a low-carbon economy. Here are some of the most notable ones:

European Union Taxonomy: The EU Taxonomy is a classification system that sets out the criteria and thresholds for economic activities that can be considered environmentally sustainable. It covers six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.

China Green Bond Endorsed Project Catalogue: The Green Bond Endorsed Project Catalogue is a list of eligible projects that can be financed by green bonds in China. The catalogue includes a wide range of projects across multiple sectors, such as renewable energy, energy efficiency, clean transportation, and pollution control.

ASEAN Sustainable Finance Taxonomy: The ASEAN Taxonomy for Sustainable Finance has been developed to serve as a common building block that enables an orderly transition and fosters sustainable finance adoption by ASEAN member states (AMS). It is a multi-tiered framework, consisting of two main elements: the Foundation Framework (applicable to all AMS and allows a qualitative assessment of activities), and the Plus Standard with metrics and thresholds to further qualify and benchmark eligible green activities and investments. The eASEAN Taxonomy include the following environmental objectives: climate change and adaptation, protection of healthy ecosystem and biodiversity, and promotion of resource resilience and transition to circular economy.

Countries in the region such as Singapore, Vietnam, Thailand and the Philippines are also developing their own national green finance taxonomies. These taxonomies are expected to play an increasingly important role in promoting sustainable finance and addressing the challenges of climate change in these economies.

What does it mean for businesses and the financial sector?

Complying with a green finance taxonomy can pose several challenges for businesses and financial institutions.

Data availability and quality: To comply with the taxonomy, businesses and financial institutions need to collect and report data on the environmental impact of their activities and investments. However, this data is often fragmented, incomplete, or of poor quality, making it challenging to accurately classify activities and investments.

Complexity and granularity: The taxonomy is designed to be granular and specific, which means that it can be complex and difficult to navigate. Businesses and financial institutions need to have a deep understanding of the taxonomy’s criteria and thresholds to accurately classify their activities and investments.

Lack of harmonization: Different regions and countries may have their own green finance taxonomies, which can create confusion and inconsistency. This lack of harmonization can make it difficult for businesses and financial institutions to comply with multiple taxonomies.

Regulatory uncertainty: The regulatory landscape for green finance is rapidly evolving, and businesses and financial institutions may face uncertainty around how the taxonomy will be implemented and enforced.

Addressing these challenges will require concerted efforts from governments, businesses, and financial institutions to improve data quality, harmonize taxonomies, provide clarity around regulatory requirements, and promote capacity-building and knowledge-sharing.