Last updated on 26 October 2022 by FoSDA Workstream on Taxonomies
A feature of the development of a green and sustainable bond market, which has grown from $3bn outstanding to $3 trillion in the past 12 years, has been the development of clear guidance around eligible investments and activities. Based on a model first developed by the Climate Bonds Initiative in 2012, these provide clear market boundaries using a “science-based” framework and are designed to minimise the transaction cost for bond investors and issuers. They use a “shopping list” approach to criteria with binary definitions suitable for the sort of standardisation that shapes financial markets.
In China from 2015 such definitions have been enshrined in a “Green Projects Catalogue”, endorsed by the central bank; in the European Union they form the “Taxonomy of Sustainable Finance” regulation that now underpins sustainable finance disclosure requirements affecting banks, investors and corporates.
Some 20 countries have now developed or are developing such national taxonomies.
While there are some differences in approaches, countries are using common principles: science-based, dynamic and binary. Most are also incorporating some form of ‘do no significant harm’ (DNSH) measures that are a feature of the EU taxonomy. They often have some criteria that are regionally specific.
At the same time, the global acknowledgment of taxonomies being an important tool for scaling up sustainable finance and reducing greenwashing has sparked discussions around the need for greater alignment and interoperability, as well as comparability and data quality.
Since the last update of the FoSDA international taxonomy overview in September 2021, the world has seen more countries make taxonomy announcements. In 2021, only four countries and the EU had regulations or guidance in place. Drafts existed in three jurisdictions and developments were observed in 14 countries and in the Association of Southeast Asian Nations (ASEAN); discussions were underway in two. In the 2022 update, the number of jurisdictions that have taxonomies has grown to 10 with also taxonomies in place in the EU and the ASEAN. High-level guidance exists in two countries and regulation is being developed in 13. In one country the taxonomy is out for consultation and in two it is under discussion.
In addition to existing taxonomy regulations or guidance in China, the European Union, Japan, Malaysia and Mongolia, taxonomy regulations have been launched in the ASEAN, Colombia, Indonesia, Russia, South Africa, South Korea, Sri Lanka, and Vietnam. High-level guidance has also been published in Bangladesh.
The EU regulation was specified with a delegated act supplementing Article 8 (December 2021), which details the content, methodology and presentation of information to be disclosed by financial and non-financial undertakings concerning the proportion of environmentally sustainable economic activities in their business, investments or lending activities. In March 2022, the European Commission included specific nuclear and (very limited scope and term) gas energy activities in the list of economic activities covered by the EU taxonomy. The EU Platform on Sustainable Finance has also made proposals for an extended environmental taxonomy as well as a social taxonomy, but it’s unclear at this stage whether these will be implemented.
China and the EU have achieved noticeable progress in the Common Ground Taxonomy (CGT), resulting from the comparison of commonalities and differences between the EU Sustainable Finance Taxonomy and China’s Green Bond Endorsed Project Catalogue. The latest version of CGT was published in June 2022 and covers 72 jointly recognised climate mitigation activities.
Taxonomy regulations continue to be developed in Canada, Chile, Dominican Republic, India, Kazakhstan, New Zealand, Thailand, the UK, and the United Arab Emirates. Other jurisdictions have joined this work, including Australia, Egypt, Costa Rica, Mexico, and New Zealand. Singapore has had its taxonomy out for consultation and aims to finalise it in 2023.
Discussions on possible taxonomies have also started in the Philippines and Brazil. The US Securities and Exchange Commission (SEC) has disclosure and ESG regulations, but a sustainable taxonomy is not part of current plans.
New taxonomy regulations or guidance (since 2021 FoSDA update)
ASEAN. On 10 November 2021, ASEAN released the first version of the ASEAN Taxonomy for Sustainable Finance. The taxonomy aims to serve as a common building block that enables an orderly transition and promotes sustainable finance adoption by the ASEAN member states. The taxonomy consists of two key elements: the foundation framework which is applicable to all ASEAN member states 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. Among the most important criteria essential for economic activities are DNSH and the existence of remedial efforts to transition.
Colombia. This taxonomy, launched by Colombian President Ivan Duque in April 2022, became the first Latin American green taxonomy and is largely based on its EU counterpart with a distinctive emphasis on land use sectors, specifically livestock, agriculture, and forestry.
Indonesia. Indonesia launched its first green taxonomy in January 2022. Based on the Indonesian Standard for Industrial Classification (KBLI), it classifies activities by applying a traffic light system: green (DNSH, apply minimum safeguard, provide positive impact to the environment and align with the environmental objective of the taxonomy), yellow (DNSH), and red (harmful activities).
Russia. Russia’s parliament passed legislation introducing a national classification of sustainable development projects in September 2021. The taxonomy was developed by the Russian Development Bank and the Russian government with the aim of being compatible with international best practices. The regulation covers both green and adaptation projects.
South Africa. The launch of South Africa’s green finance taxonomy was announced by the Treasury in April 2022. While reflecting national priorities, the taxonomy is aligned with international trends and takes into account the EU model.
South Korea. The country published its K-Taxonomy in December 2021 to provide principles and standards for environmentally sustainable economic activities. The K-Taxonomy regulation initially included gas but not nuclear power. In September 2022, South Korea’s Ministry of Environment published a revised draft of the K-Taxonomy, adding nuclear power to the list of green economic activities.
Sri Lanka. The Central Bank of Sri Lanka launched the Sri Lanka Green Finance Taxonomy in May 2022. According to the bank, the taxonomy is a key action item outlined in the Roadmap for Sustainable Finance of Sri Lanka and was prepared in line with international best practices while harmonising for local context.
New taxonomy regulations or guidance under development
Australia. The Australian Sustainable Finance Institute, working closely with the government and regulators, has published a report outlining the key considerations that could form the basis of an Australian taxonomy.
Mexico. The Mexican government and the Central Bank of Mexico have started a dialogue about defining a national taxonomy on sustainable investments.
New taxonomy regulations or guidance are also under development in Costa Rica, New Zealand, and Egypt.
New discussions on possible taxonomy regulations
Philippines. The Philippines Inter-Agency Technical Working Group for Sustainable Finance developed the Sustainable Finance Roadmap, which outlines the country’s strategic plans, including the creation of a principles-based taxonomy.
Creating a national taxonomy regulation has also started to be discussed in Brazil.