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Blog | Shaping the Future of Finance: Exploring the Global Rise of Sustainable Finance Taxonomies

Updated: Apr 26

Analyzing the global landscape of taxonomies allows policymakers to understand the differences in political and technical aspects across jurisdictions


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Key Takeaways:

  1. National taxonomies enable countries to tailor their frameworks to local contexts and enhance ownership and usability in the local market. However, the proliferation of different taxonomies raises concerns about market fragmentation.

  2. Analyzing the global landscape of taxonomies allows policymakers to understand the differences in political and technical aspects across jurisdictions. This type of analysis can help stakeholders adapt their taxonomies to enhance interoperability.

  3. International collaboration and alignment efforts are underway to reduce fragmentation and enhance taxonomy harmonization. Initiatives like the Common Ground Taxonomy (CGT), the ASEAN taxonomy, the LAC Common Framework and collaboration among global policy institutions demonstrate regional and international alignment efforts.


Why is sustainable finance needed?


Developing countries are still disproportionally facing a staggering $4 trillion funding gap to implement their Sustainable Development Goals (SDGs), which inherently puts the goals of the Paris Agreement out of reach. There is a clear need to align finance and investments into sustainable action by channeling public and private capital towards well-defined and tangible solutions, relevant to countries’ decarbonization pathways, Nationally Determined Contributions (NDCs), SDGs and other relevant sustainable activities. As such, the common usage of sustainable finance taxonomies has become a key regulatory policy tool to align and determine if and to what extent economic activities contribute to global sustainable objectives and national and international commitments.


The rise of taxonomies as a key regulatory policy tool


The introduction of the European Union (EU) taxonomy regulation in 2020 prompted the rise of sustainable finance taxonomies as a framework to facilitate financing efforts, increase market clarity and accelerate the transition towards a net zero economy. Even though jurisdictions such as Mongolia and Bangladesh have previously developed taxonomies, the EU taxonomy was the first one to cover a broad range of sectors and sustainability objectives in a very detailed and comprehensive mandatory regulation.


Subsequently, many jurisdictions have used the EU taxonomy as a reference point, adapting (or localizing) sustainable objectives, economic sectors and economic activities, according to their national context. As of now, numerous countries have developed and implemented taxonomies, with many other countries following suit with plans to create their own national taxonomies, as seen in the infographic below.

map of taxonomies

Global Landscape of Sustainable Finance Taxonomies
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The map provides a visual representation of the global landscape of taxonomies, highlighting countries at different stages of taxonomy development. Between 2019 and 2023, the first movers such as Mongolia, Bangladesh, the European Union, China, Japan and Malaysia pioneered taxonomy implementation, followed closely by the second movers, including South Korea, Russia, the Association of Southeast Nations (ASEAN), Indonesia and Georgia. This progress allowed East Asia and Europe to make significant strides towards taxonomy implementation.


The establishment of Colombia’s taxonomy in 2022 prompted substantial progress within the LAC region, with Mexico forming its own national taxonomy in 2023. Most notably, Peru, the Dominican Republic, Chile and Panama are developing their taxonomies, and the majority of Central American countries have agreed to join the movement to begin their taxonomy journeys, prompting considerable advancements in the region.


A similar movement is likely to occur in the Middle East and Africa, as South Africa was first to implement one in the region in 2022. While Senegal, Rwanda and the UAE are already in the under-development stage, it will be interesting to see which countries will follow suit.

By identifying areas of convergence and divergence, policymakers, investors and other stakeholders can identify geographic patterns and potential opportunities for cross-border collaboration and knowledge exchange.


Interoperability: a methodological principle for taxonomy development


National taxonomies allow policymakers to develop and tailor them in a way that directly reflects the local context by aligning them to specific environmental objectives and national commitments. The taxonomy empowers countries through ensuring ownership and maximizing usability in the local market. However, due to the wide array of different taxonomies, there is now a concern of market fragmentation. Discrepancies in sustainable, green or climate definitions, prioritized sectors, inconsistent classification of economic activities and a lack of a universal taxonomy standard all pose challenges for market actors and taxonomy users.


To prevent market fragmentation and with the aim of promoting a harmonized market signaling, interoperability is crucial. Interoperability is a key principle that ensures the taxonomy is developed under a methodological approach that can communicate or align with other taxonomies worldwide. Interoperability not only promotes market signaling, but also facilitates cross-border sustainable investment flows and increases investor confidence in a country or region. As a result, it is imperative that taxonomies achieve an adequate balance between aligning with international objectives and complementing regional and national circumstances.


Jurisdictions are beginning to understand the importance of having a common methodological approach and understanding when developing taxonomies. Efforts made by jurisdictions and the international community are now being used to unify and deepen global collaboration to reduce fragmentation. However, the main challenge still lies within finding the adequate balance between harmonization and localization, both terms defined by CCAP and GIZ in the policy brief, Towards a Common Pathway Across Sustainable Finance Taxonomies:


  • Harmonization is the process of aligning a taxonomy with other international or regional taxonomies, by using common objectives, sectors, governance structure, economic activities and science-based metrics and thresholds. It enables easier interoperability, relevant for cross-border and inter-market financial flows, as it facilitates investments that align with international goals.

  • Localization is the process in which jurisdictions adopt and adjust methodological features and/or international or regional practices (i.e., from the EU taxonomy, from the ASEAN taxonomy) to reflect local circumstances, such as national commitments, sectoral priorities, screening criteria, economic development and market needs. Localization must reflect jurisdictions’ contexts to ensure effective usability and acceptance by local stakeholders.


Why do we analyze the global landscape of taxonomies?


When comparing and analyzing the global landscape of taxonomies, it is useful not only to identify which countries are first or second movers but to also observe the differences in political and technical components across jurisdictions, such as governance, objectives, economic activities, enforceability, eligibility approaches, metrics, thresholds and verification procedures.


As previously researched by CCAP and GIZ, there are technical aspects that vary across jurisdictions such as: sectoral priorities, eligibility approaches to determine if an activity, project, asset or entity is sustainable or not, the metrics and thresholds used “Do No Significant Harm (DNSH)” and minimum social safeguards (MSS). However, aspects such as the SDGs, Paris Agreement goals, creation of steering groups, linking taxonomies to high-level policies, using ISIC as the classification for economic activities and the coverage of climate change mitigation are becoming commonalities among taxonomies.


In addition, the enforceability of taxonomies differs among nations, where some countries legally require mandatory reporting, while others are voluntary. The primary focus of mandatory implementation lies in its disclosure obligations. For example, large investing companies in the EU are obligated to disclose their compliance with the taxonomy. Similarly, in China, the use of the Green Industry Guiding Catalogue is a compulsory requirement for sustainable financing activities. While mandatory reporting requires more comprehensive regulation and compliance measures, it ensures standardization and consistency, promoting sustainable investment on a broader scale and driving substantial change in investment patterns. Conversely, the voluntary use of taxonomies focuses on the designing of sustainable finance products or funds, establishing criteria for financing and investing programs, central banks' interventions, public procurement mandates, industrial policies and other related initiatives. Countries such as South Africa, Mexico, Australia and Russia have implemented voluntary disclosure frameworks. The voluntary approach allows flexibility and promotes innovation in sustainable finance, however, there exists a risk of greenwashing due to a lack of compliance measures.


By analyzing the global landscape of taxonomies, policymakers and members of technical working groups can better understand how the market is being signaled and can envision whether a taxonomy enhances or undermines interoperability. They can then determine which political and technical elements can be harmonized or localized and which pieces might require more individual attention from local stakeholders to adapt to national economic and social circumstances.


The international community moving towards taxonomy alignment


While there are no plans so far to introduce a globally standardized taxonomy, general taxonomy alignment efforts are already underway to make harmonization easy for jurisdictions planning to develop a taxonomy. China and the EU collaborated and produced the Common Ground Taxonomy (CGT) for the International Platform on Sustainable Finance (IPSF) in June 2022. The CGT provides a methodology to identify the commonalities and differences between the EU and Chinese taxonomy. The aim of this tool is to provide a starting point for the development of new taxonomies and act as a shared reference point for countries. Policy makers can use this document to gain insight into which activities for climate change mitigation should be included within the scope of their respective national taxonomies. This is a valuable frame of reference that can be used when assessing the screening technical criteria and legal standards of activities.


Initiatives such as the ASEAN taxonomy demonstrate regional harmonization. Published in 2021 and updated in 2023, the ASEAN taxonomy provides a clear framework for regional jurisdictions to collectively transition towards and foster sustainable finance. This taxonomy is essentially an overarching guide which accommodates the differences in the diverse economies, financial structures and transition trajectories. The taxonomy carefully takes into account the local context. It considers their unique environmental and social challenges, covering a wide range of sectors relevant to the region, while considering the perspectives of local stakeholders. For example, The ASEAN Taxonomy Board (ATB) sets eligibility and alignment with Technical Screening Criteria (TSC), in a way that allows flexibility for individual ASEAN Members States (AMS) by giving them the responsibility to set policies for activities that occur within their own territory. AMS considers their economic and technical realities, while reflecting the decarbonization framework for ASEAN as a whole. As such, the newly-launched Thailand Taxonomy has heavily referenced and aligned itself to the ASEAN taxonomy, due to its compatibility.


Similarly, the Working Group on Sustainable Finance Taxonomies for Latin America and the Caribbean (LAC) developed the Common Framework of Sustainable Finance Taxonomies in July 2023. While national taxonomies have already been implemented in several LAC jurisdictions, the risk of inoperability poses a threat to cross-country financing flows. The LAC Common Framework draws on international best practices, including the EU, to provide guiding principles that foster regional alignment and establish classification systems for sectors and activities to ensure transparency and interoperability. This is a valuable frame of reference that can be used when establishing metrics and pathways for eligibility criteria in sectors with high GHG emissions, specifically to choose the optional metrics by the desired level of ambition.


Global policy institutions such as the IMF, the Bank for International Settlements, Organization for Economic Co-operation and Development (OECD) and the World Bank play an influential role in advancing the climate information architecture. These institutions have collaborated on a common minimum guidance for the G20 high-level voluntary principles for sustainable finance alignment approaches. Building on past work such as the Common Ground Taxonomy, the guide focuses on asset-level approaches with an emphasis on taxonomies and interoperability.


Conclusion


The imperative need for sustainable finance echoes across the globe. Sustainable finance taxonomies have emerged as a transformative regulatory policy tool for countries seeking to build transparent frameworks to ensure the alignment of financial flows and financial systems with SDGs and Paris Agreement goals. The rise of these taxonomies has been driven by the introduction of the mandatory EU taxonomy regulation, serving as a reference point for many jurisdictions while also signaling market participants worldwide. Collaborative milestones like the CGT, ASEAN and Common framework in LAC exemplify the concerted efforts toward alignment, creating a bridge between diverse taxonomies, propelling market efficiency, cross-border investment flows and increasing stakeholder trust. As more jurisdictions join this movement and embark on developing their own taxonomies, the global landscape of sustainable finance will witness further expansion and evolution that is worth analyzing—specifically when challenges arise of localization of climate screening criteria, including climate vulnerability and minimum social safeguards in developing countries with limited capacities to develop and implement taxonomies at the speed required by the market and the international community.


 

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.


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