Chronos collaborates on implementation Guide for Governments on Sustainable Finance Taxonomies
Chronos collaborates on implementation Guide for Governments on Sustainable Finance Taxonomies
Dr Rory Sullivan and Robert Black
The Principles for Responsible Investment, the World Bank Group and Chronos Sustainability have published a new report Implementation Guide for Sustainable Investment Policy and Regulation Tools – Taxonomies of Sustainable Economic Activities, https://www.unpri.org/download?ac=16315
The report provides practical guidance to regulators and policymakers on the design and implementation of sustainable finance taxonomies. It contains examples and reflections from policymakers who have developed or are considering developing taxonomies, and in-depth case-studies from the ASEAN region, EU, China, Malaysia, South Africa.
This is the latest output from a programme of work, coordinated by the PRI and the World Bank’s Financial Stability and Integrity Team, to support government policy makers and regulators in implementing reforms to build a sustainable financial system.
Taking a closer look at taxonomies
Taxonomies are recognised as a central elements of policy frameworks that underpin sustainable financial systems.
Essentially, taxonomies are classification systems that help investors and other stakeholders understand whether an economic activity is ‘environmentally and socially sustainable’. In practice, sustainable finance taxonomies generally comprise a list of activities that are considered to align with specified social or environmental goals, alongside technical criteria (e.g. performance metrics or thresholds) to assess when those activities are aligned with sustainability goals.
Such taxonomies are important because they provide a common language for investors, issuers, project promoters and policy makers. They help investors assess whether investments meet robust sustainability standards and align with policy commitments such as the Paris Agreement on Climate Change, the Sustainable Development Goals (SDGs) and national sustainability and climate change goals.
By providing consistent, widely recognised standards, taxonomies can provide clarity on what is a green and/or sustainable activity, reduce the risk of greenwashing, help investors and companies to plan and report on a transition towards sustainability, and help policy makers develop policies that are consistent with relevant long-term objectives such as those of the Paris Agreement.
In order to achieve these benefits at the global level and to accelerate the flow of sustainable finance, it is essential that taxonomies are ‘interoperable’. This means that taxonomies should:
Have similar objectives as other taxonomies, although there can be some adaptation to national contexts;
Use the same or easily comparable industry classification systems to define economic activities;
Have a similar approach regarding the design of technical screening criteria (i.e. including both significant contribution and do no significant harm criteria) and use technical screening criteria that are transparent and broadly similar;
Use consistent metrics and calculation methodologies.
The importance of interoperability is recognised by many policymakers, and is a key consideration in the design of new taxonomies. One of the case-studies presented in the report relates to the ASEAN Taxonomy, with one of the architects of that taxonomy, Eugene Wong (Chief Executive Officer, Sustainable Finance Institute Asia) observing: “The unique feature of the ASEAN Taxonomy is its emphasis on allowing all 10 of the ASEAN member states to be involved, even if they are starting from a very low base, by having a principles-based Foundation Framework, and a Plus Standard with metrics and thresholds that itself is tiered to have more than one threshold for each economic activity to allow for the different starting points of each ASEAN member state. This enables every country to join and, over time and at a rate consistent with their national priorities and economic development, to successfully transition to a low-carbon, sustainable economy.”