Green taxonomies are touted for their consistency, coherence and uniformity. They allow markets to allocate capital efficiently for the greatest impact and give investors more transparency in risk disclosures and risks. The question is, what happens if you are not the only person who wants a green taxonomy?
The number of taxonomies for identifying and categorizing sustainable investments increased as the assets did. At a digital EU side-event during COP27 ‘finance day’, Ma Jun, president of the Institute of Finance and Sustainability, estimated there to be around 200 green finance taxonomies currently in development by different jurisdictions, NGOs, and firms. The market is a complex system, with many variables that can affect its integrity.
The EU taxonomy, for example, classifies environmental sustainable economic activities by using metrics and thresholds. China’s Green Bond Endorsed Project Catalogue takes a completely different approach, listing projects and assets that qualify for financing using green bonds. Taxonomies that are based on the same blueprint may not be able communicate with each other. Definitions and thresholds can vary widely, as is the case for the UK, South Africa, and Mexico drafts.
This fragmentation of market jurisdictions allows greenwashers the opportunity to sneak under different hurdles, through different goalposts, raising transaction costs and reducing trust.
Common Ground Taxonomy
In order to achieve this, an IPSF working group on taxonomy was created. Its goal is to develop a taxonomy that will be used by both the EU and Chinese. Jun announced this week five Chinese major banks used CGT. Transactions in CGT-eligible Trade Finance and syndicated Loans transactions were conducted by Deutsche Bank, Standard Chartered and Standard Chartered.
Jun said that CGT has become a preferred benchmark for countries who want to develop their own taxonomies. Sri Lankan central bank developed its taxonomy on green finance using the IPSF CGT. Hong Kong uses CGT for their taxonomies as well. Some international banks use it even to develop internal taxonomies. The CGT will be extended to include new environmental objectives such as adaption strategies, pollution control, and biodiversity protection, as well as broader activities in mitigation, including IT and professional service.
Carola Morena Valenzuela is the director of International and Foreign Affairs for Chile. She has raised concerns about the complexity of definitions and the possibility of taxonomies being used to the detriment of others. Sui Hui Lim is the deputy director of Singapore’s Money Authority. She also echoed this sentiment, given that environmental advancements vary from one region to the next. Sui Hui Lim, deputy director of the Money Authority of Singapore, echoed this sentiment given the differences in environmental progress from region to region.
Good enough is good enough
Eila Kraivi, Chief Sustainable Finance Advisor at the European Investment Bank, was cautious in her wish that “perfect” doesn’t become an enemy to the good, as she feared a worldwide, all-encompassing, taxonomy would not be possible. However, taxonomies built using a common architecture and method will help them compare and interact. Eila Kreivi is satisfied with the fact that thresholds and criteria are flexible to suit each jurisdiction. She gave Columbia as an example, which uses the EU taxonomy framework but adds a land-use category important for their ecosystem.
Prasad Ananthakrishnan is the chief advisor for Climate Finance Policy and the International Monetary Fund. He believes that taxonomies play an important role in standardising carbon intensity calculations based on science. His concerns are similar to Kreivi’s: too many chefs could ruin the low-carbon soup.
The IMF has written guidelines, in conjunction with the World Bank, relating the basic topics of the taxonomies design, and, importantly, taking into account “do not significant harm” considerations. The goal of this work is to give a direction and practical guidelines to help implement taxonomies at asset levels, as well as the option to examine portfolio-level approaches. Ananthakrishnan expressed the hope that, although their work currently only covers climate-related topics, they are creating it with an eye to incorporating biodiversity issues at a future stage.
Kreivi placed special emphasis on DNSH’s nuance. If there’s something that is very clear, such as the emission targets for climate change mitigation, for instance, 270 grammes of carbon dioxide per kilowatthour, then it makes sense. This is very clear”. It’s difficult to establish an objective measurement when comparing taxonomies in other fields. So she proposes the use of yes/no closed questions, “this either complies or it doesn’t”, to allow comparison of taxonomies as well as effective verification of claims.
Market Makers
Sean Kidney, CEO Climate Bonds Initiative, feels optimistic that the imperative of successful taxonomies is recognised globally – “we don’t have time to get muddled in confusion…we know that in financial markets clarity, commoditisation, and standardisation speeds activity”
This isn’t relative ESG. It is a list of absolute measurements, an agenda for the future. The best coal plant isn’t the only thing that matters. “It’s different from what we were using before”
“We’re [all] The same principles should be followed. The same principles apply to everyone. It may seem complicated and that everyone wears different clothing, but it is the same fabric. We must make this clear and evident to the public.
Sian Barnett is the deputy editor of Sustainable Investment