The brief takes an in-depth look at taxonomies and provides a high-level overview of their relevance, key process principles and practical development steps
CCAP and GIZ are pleased to announce the publication of the policy brief, Towards a Common Pathway Across Sustainable Finance Taxonomies. The brief takes an in-depth look at taxonomies and provides a high-level overview of their relevance, key process principles and practical development steps. To enable cross-country learning and alignment, the policy brief also sets out a detailed comparison of select taxonomies that have already been adopted, many of which in emerging and developing countries, outlining key commonalities and divergences.
The publication is aimed to help readers familiarize themselves with the core concepts of taxonomies and key considerations for the development process. It also provides a basic orientation for countries that navigate through the taxonomy development process and further guides decision makers who embark on the journey of developing a national taxonomy by providing key information and insights.
Taxonomies are crucial building blocks in developing sustainable financial systems. A sustainable finance taxonomy is a critical regulatory policy instrument for identifying if and to what extent economic activities contribute to international goals and national commitments aligned with the Paris Climate Agreement or the Sustainable Development Goals (SDGs). They can increase the resilience of financial systems by enhancing the management of sustainability risks and contribute to closing the funding gap for implementing sustainable economic activities.
In recent years, there has been enormous momentum across the world to systematically integrate sustainability into financial decision making. However, channeling capital into sustainability-aligned investments requires a clear definition and common understanding of what qualifies as sustainable to establish a level playing field, build trust and avoid greenwashing. Taxonomies are emerging as powerful policy instruments to provide a granular classification of sustainable economic activities.
The policy brief showcases how jurisdictions and institutions are driving consensus around a common understanding of sustainable finance taxonomies to signal to market participants and investors. Amidst COP27, there is an urgency to align public and private financial flows. This calls for a common definition of sustainable economic activities and a certain level of international harmonization in the methodology of the taxonomy development process.
The main challenge, however, is how to develop taxonomies that reflect a specific country’s context and sustainability needs, while being interoperable, allowing international capital to be shifted towards sustainable economic activities. As there is no internationally agreed-upon standard to use as a reference, taxonomies could be undermined by market fragmentation, information asymmetry and a burst of greenwashing practices. This is in part why the importance of having a common language and a homogeneous understanding of how to develop sustainable finance taxonomies is becoming more evident as more jurisdictions express interest in using taxonomies as a regulatory policy instrument.
Taxonomies should evolve with political priorities, regulations, financial market needs and sustainability ambitions. As a result, it is necessary for taxonomy users and developers to periodically review changes and integrate best practices and lessons learned.
Useful practices for taxonomy development:
Create a steering group that represents diverse participants and sectoral experts and establish an inclusive governance structure to ensure acceptance and applicability in the market
Set climate change goals linked to international commitments and national policies, such as the Paris Agreement goals
Link taxonomies objectives with national political priorities, such as NDCs
Use an internationally recognized classification code for economic sectors and activities already used by market participants, such as ISIC
Recommendations for jurisdictions that have not yet initiated but have an intention to develop taxonomies:
Establish main objectives and identify key priority sectors.
Good governance processes can help from the early stages of taxonomy development.
Capacity building is key to developing the foundations for all phases, including the preparation, development, piloting, and implementation processes.
The process of taxonomy development is not static but instead is continuously evolving.
Recommendations for jurisdictions that have already developed their own taxonomies:
Developing a taxonomy is not the final milestone but rather the beginning of a complex process of implementation
Governance structures are key for both taxonomy development and implementation
Basic principles and frameworks for credibility and transparency should be established as a core part of the taxonomy development process, in line with international frameworks
Definitions should be flexible, with consideration of interoperability at the international level
About Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ) GmbH
On behalf of the German Federal Ministry of Economic Cooperation and Development (BMZ), GIZ supports sustainable development in emerging markets and developing countries. In the field of sustainable finance, GIZ works with partner countries to create enabling framework conditions through policy and reform processes, implementing ambitious sustainable finance practices and raising awareness and capacities through training, research and peer learning. GIZ also supports the market development of sustainable finance products, such as green bonds and loans, in partner countries.
CCAP’s mission is to support every step of climate action, from ambition to implementation. A recognized world leader in climate policy and action, CCAP creates innovative, replicable climate solutions, strengthens capacities, and promotes best practices across the local, national, and international levels to accelerate the transition to a net-zero, climate resilient future. CCAP was founded in 1985 and is based in Washington, DC.