Whilst taxonomies can help create guidance and confidence in a market, they can also stifle innovation if they are not set correctly. So what is a taxonomy exactly ?
Taxonomies are basically a dictionary, reference, set of definitions which can help to classify if an economic activity can be defined as green or not.
Key Market References:
It is useful to understand the common and most used taxonomies in the market. These will evolve and develop more into the future. Please see below the most common taxonomies in the market:
- Climate Bond Initiative Taxonomy;
- ASEAN Taxonomy;
- Malaysia: Climate Change and Principles Based Taxonomy;
- EU Taxonomy;
- China <> EU Common Ground Taxonomy;
- PBOC China Green Catalogue.
Current Taxonomies (Global Picture):
The two best reports we have seen on taxonomies can be found at the links here:
ICMA:
Natixis:
https://gsh.cib.natixis.com/our-center-of-expertise/articles/the-new-geography-of-taxonomies
A particular summary for the Natixis Report (see next image below) is most useful and we will see more reference points going forward. More and more taxonomies are emerging which are currently focused on green and will evolve to include social.
How to Develop a Taxonomy:
There are also some key references in the market about how to develop a taxonomy ie:
EU Taxonomy:
World Bank:
OECD:
Other Guidance Needed:
It is also important that we collectively don’t forget other aspects of Sustainable Finance as taxonomies don’t just resolve market challenges by themselves.
Other aspects and activities are needed for awareness raising, references for KPI/Targets, references for good transition strategies, market guidance documents and also capacity building and training for many market participants across the Sustainable Finance eco system.
Future Developments:
At this stage taxonomies are dominated by Green and Environmental aspects. As we move forward, we expect to see more social taxonomies developed (currently being developed by the EU) and more transition taxonomies as key market reference points.
A common architecture is imperative for taxonomies so that these can be compared against each other and so we have a common language to dissect them.
Regional differences will be prevalent in taxonomies, especially for social items which are more driven by localized context, with environmental aspects more global in nature.
