How policy makers can implement reforms for a sustainable financial system: taxonomies

Implementation guide for sustainable investment policy and regulation tools: taxonomies of sustainable economic activities

A taxonomy of sustainable economic activities can be defined as a classification system to help investors and other stakeholders understand whether an economic activity is environmentally and socially sustainable.

Sustainable finance taxonomies generally comprise three elements:

1. Objectives

2. Activity lists, which detail economic activities that can make a positive contribution to the objectives of the taxonomy.

3. Performance criteria, which determine whether such activities are aligned with the objectives of the taxonomy. Criteria should be defined for how economic activities can significantly contribute to the objectives of the sustainable finance taxonomy, as well as for ensuring that economic activities do no significant harm to any of the objectives.

Alignment – or, ideally, interoperability – among national or regional taxonomies is important given that a key driver for taxonomy development has been a lack of consistency in defining sustainable activities, which has hindered a scaling up of sustainable investment.

From a design perspective, interoperability requires taxonomies to:

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 full paper (see below) elaborates on the above, providing guidance on the design and implementation of sustainable finance taxonomies. It covers the following steps: