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Sustainable finance taxonomies: A critical tool for green investment

Pressure to meet national and global climate goals, along with demand from investors, is pushing countries to develop new tools to facilitate sustainable development. One important method shaping the investment landscape to achieve these goals are sustainable finance taxonomies, which can help nations facilitate low-carbon projects and can help lend clarity to investors, both local and international.

In this rapidly-evolving context, now is a good time to take a look at what sustainable finance taxonomies are and why we need them.

What is a sustainable finance taxonomy?

A sustainable finance taxonomy is a classification system of economic activities that provides criteria to evaluate activities’ environmental sustainability. It provides definitions and guidelines to investors to help them know what economic activities are sustainable and in what circumstances. Taxonomies are usually developed by governing bodies, such as the EU or an individual country, or financial institutions as a policy tool.

Taxonomies helps investors and corporations working within a region to make investment decisions and to allocate capital. By providing a clear definition on what is sustainable, taxonomies increase market clarity. Market clarity can help attract international investment by reducing risk.

Taxonomies also help governments achieve carbon-reduction goals and foster green investment. By providing clarity, ideally defined through technical screening criteria, a sustainable finance taxonomy will enhance market integrity and transparency and reduce greenwashing practices. Countries can use taxonomies to achieve climate or sustainability goals by setting sustainable finance definitions in line with the national goals (e.g., a country’s Nationally Determined Contribution). Finally, they enable countries to identify and address financial and investment gaps across all sectors.

The current state of sustainable finance taxonomies