The growing emphasis on sustainable practices has led to the development of classification systems known as taxonomies. These frameworks categorize economic activities based on their environmental sustainability, guiding investors, companies, and policymakers. By creating consistent criteria, taxonomies help identify “green” or “transition” activities that contribute to specific environmental objectives.
This blog covers global taxonomies in sustainable finance. It offers an overview of the European Union Taxonomy and highlights developments in taxonomy initiatives across the Americas and the Asia-Pacific region. It also emphasizes the importance of taxonomies in promoting sustainable investments and achieving climate objectives by providing insights into how these frameworks guide investors, companies, and policymakers.
The EU Taxonomy: A Model for Sustainable Investment
The EU Taxonomy is a comprehensive classification system that supports sustainable investments, aligning with the European Green Deal and the EU’s goal of achieving climate neutrality by 2050. At the beginning of 2024, this taxonomy expanded its objectives to include four additional environmental goals beyond climate change:
- Water and Marine Resources
- Transition to a Circular Economy
- Pollution Prevention
- Biodiversity
This update introduced new activities and sectors, including the manufacturing of electronic equipment and urban wastewater management. It also included detailed criteria for qualifying as ‘sustainable’ under these objectives.
To enhance transparency, financial institutions will be required to report their Green Asset Ratio (GAR), indicating the proportion of sustainable assets in their portfolios. This measure aligns with the Corporate Sustainability Reporting Directive (CSRD), which will apply to EU-listed companies starting in 2025, with full implementation for large organizations in 2026. All you need to know about CSRD.
In addition, the European Commission has released FAQs to clarify the “Do No Significant Harm” criteria, minimum safeguards, and alignment with the Sustainable Finance Disclosure Regulation (SFDR). These clarifications aim to assist companies in understanding their legal obligations and in disclosing their activities under both the Taxonomy and SFDR.
Taxonomy Developments Across the Americas
United States
In the U.S., while sustainable finance taxonomy efforts are growing, they are primarily sector-driven rather than fully regulated. The Securities and Exchange Commission (SEC) has proposed climate disclosure rules that require public companies to report climate-related risks, greenhouse gas emissions, and other ESG factors. This framework is crucial for aligning with global standards, including those set by the International Sustainability Standards Board (ISSB).
The Taskforce on Nature-related Financial Disclosures (TNFD) provides frameworks for biodiversity risk disclosures, which many U.S. companies are beginning to explore voluntarily. Additionally, the Transition Plan Taskforce (TPT) has developed a framework to guide U.S. companies in creating and disclosing their net-zero transition plans, aligning with international sustainability recommendations.
Canada
Canada is developing a taxonomy, with guidance expected in the coming year. This taxonomy will cover priority sectors such as electricity, transportation, buildings, agriculture, and forestry, with specific criteria for “green” and “transition” activities aimed at achieving Net Zero by 2050. Canada is also planning mandatory climate disclosures for large federally incorporated companies, aligning with international climate standards expected by 2025.
Mexico
Mexico has recently launched a Sustainable Taxonomy that includes six environmental and five social objectives, addressing issues like climate mitigation and gender equality. This taxonomy aligns with the EU framework while adapting to Mexico’s unique economic and social priorities, notably emphasizing sustainable mining activities.
Latin America
Countries like Colombia, Chile, and the Dominican Republic are establishing taxonomies to attract sustainable investments.
- Colombia’s taxonomy focuses on climate adaptation and biodiversity conservation.
- Chile’s roadmap includes key sectors such as energy and transport.
- The Dominican Republic is progressing with a taxonomy project currently in public consultation.
Taxonomy Initiatives in the Asia-Pacific Region
In the Asia-Pacific region, taxonomies are also emerging to facilitate sustainable finance.
The Association of Southeast Asian Nations (ASEAN) Transition Finance Guidance
Released in October 2024, this guidance supports industries crucial for regional decarbonization, particularly high-emission sectors transitioning towards sustainability. Developed with the Asian Development Bank, it provides a structured pathway for financial entities to support transitional finance initiatives.
Singapore-Asia Taxonomy
The Monetary Authority of Singapore (MAS) has introduced a taxonomy that categorizes activities as “green” or “transition,” directing capital towards sustainable projects while aligning with global standards. This framework emphasizes interoperability, mapping to the Common Ground Taxonomy, which connects EU and Chinese green finance standards.
Learn more about this Taxonomy here.
Hong Kong
Hong Kong is integrating the ISSB’s Sustainability Disclosure Standards, aiming to establish a global baseline for corporate sustainability disclosures. The local Securities and Futures Commission (SFC) is exploring the alignment of its disclosure requirements with these standards, enhancing transparency and attracting foreign investments.
How Cority Can Help
Cority offers robust solutions to help businesses adapt to the Singapore-Asia Taxonomy. Cority’s software streamlines the collection and analysis of environmental data, facilitating compliance with the taxonomy’s criteria. Real-time reporting capabilities enable businesses to track their progress against the taxonomy’s thresholds, making informed decisions about their sustainability strategies.
Moreover, Cority provides strategic advisory services to assist businesses in developing and implementing effective sustainability strategies. This includes identifying investment opportunities in decarbonization technologies, ensuring regulatory compliance, and aligning financial planning with sustainable finance opportunities. Cority’s comprehensive approach equips businesses with the tools and expertise needed to navigate the new regulatory landscape and capitalize on emerging opportunities.
