6. Conclusion
If appropriately designed, taxonomies can play a useful role in the architecture of countries financial systems, in order to channel and accelerate sustainable investment flows. In terms of common principles and metrics, keeping in mind the specific features of the EU taxonomy, similarities exist between the official definitions of sustainable finance scoped in this report.
In the five jurisdictions examined in this report -- China, the EU, Japan, France and the Netherlands -- the level of development of sustainable finance taxonomies and definitions established under law varies. Some jurisdictions have a precise nomenclature of legally defined sustainable finance products, in some cases with incentives. In other jurisdictions, like in the EU, this may be part of future developments.
The EU taxonomy, which is still under development, is unique in at least three ways. First, it interlinks six environmental objectives based on the “Do No Significant Harm” principle. Second, it makes room for transition and enabling activities, with thresholds declining over time. Third, it includes some hard-to-abate manufacturing sectors such as cement, steel, aluminium and hydrogen, all in relation to the EU ETS mechanism for identifying the best environmental performers.
Keeping in mind the unique aspects of the EU Taxonomy, the sustainable finance taxonomies and definitions in scope are largely similar for renewable power generation and green buildings. In those sectors, international investors can find a common language in existing legal definitions across jurisdictions. In non-renewable power generation and transport, international investors will find that sectoral coverage is similar across jurisdictions, but criteria for inclusion differ. None of the considered frameworks proposes an exhaustive sectoral framework: several important sectors of the economy are missing, such as aviation, maritime transport, health or the agro-food business. Sustainable finance taxonomies serve, in part, to signal where investment is needed to achieve the goals of the Paris Agreement and the SDGs. Accordingly, taxonomies may expand to cover currently missing sectors, as they will require investment in coming years to reach sustainability objectives.
The EU Taxonomy has triggered interest in various jurisdictions to consider developing sustainable finance taxonomies, which can play a useful role in the architecture of a sustainable finance system. In particular, taxonomies can help avoid green washing, reduce market fragmentation, and accelerate the flow of investment to sustainable economic activities. Taxonomies can serve as a basis to develop incentives for channelling investments to desired objectives. They can also facilitate the monitoring of such flows.
In order to serve their purpose effectively, taxonomies need to be properly designed. Based on the examination of the five taxonomies in this report, key aspects have been identified for consideration by policy makers. A first set of considerations relates to the environmental and other objectives linked to taxonomies. Such objectives can range from climate to environmental, social and governance objectives. A taxonomy identifies activities that are already “green”, but can also identify activities in transition and even “brown” activities. It should use a system approach as a basis to inform the identification of eligible economic activities, and to take into account the different pathways that can lead to the desired longer-term environmental goal. It also should be able to adapt to innovation and technological development. A second set of considerations pertains to the usability of a taxonomy for its end users, issuers and investors. Ease of use is an important consideration for quick and efficient market uptake. Data availability and verification are key aspects, as well as proportionality.
While taxonomies may be designed initially to serve domestic or regional environmental objectives, they will be used by global corporate and financial actors, with activities and investment across various jurisdictions. To enhance international dialogue and cooperation on taxonomies, the EU has initiated a Platform, to which the OECD is an observer. Going forward, disseminating knowledge and guidance for best practice in taxonomy design can support countries in developing such taxonomies. It also can facilitate international cooperation by harmonising principles and approaches where feasible and desirable, while taking into account the specific contexts and transition trajectories as needed. These areas are proposed as a direction for future research.