Where does the EU Taxonomy fit into the global landscape?
The EU Taxonomy
The EU Taxonomy is becoming increasingly recognised within Europe, with thousands of companies set to begin reporting based on the standard this year. The goal of the EU taxonomy is to set a harmonised ‘gold standard’ on sustainability reporting to help guide investors, direct capital to green activities, and combat greenwashing. The taxonomy standards are set to play a key role in the EU’s climate goals and policy in the coming years. However, the EU is not the only one developing a sustainable finance taxonomy; there are several countries working on their own sustainability taxonomies, including China, the UK, Mexico, Canada, and Russia. This raises questions as to how these taxonomies will interact, and how global companies and investors should expect to deal with these overlapping standards.
Common features of these sustainable finance taxonomies can be found in their design and conception. Most of the developed or proposed taxonomies present a classification tool that helps investors and companies make informed investment decisions on sustainable economic activities. They are aimed at establishing market clarity on what is sustainable in terms of environmental or social issues. ‘Green’ taxonomies focused on environmental impact of economic activities are the most common, but social and transitional aspects are increasingly being included.
However, as many of the taxonomies are in development stages, there has been a lack of comparison between the different frameworks in these jurisdictions. Many of these countries have assessed the EU criteria and are taking these into account when building their frameworks. For example, The UK Green Technical Advisory Group is reviewing the EU metrics to adapt them for the UK market. In Canada, the development of a Transition Taxonomy is being financed by the private sector. The Canadian Standards Association Technical Committee for Sustainable Finance oversees the Taxonomy which will be based on the EU Taxonomy.
China has already implemented a green taxonomy. In 2020, the EU and China initiated a working group on taxonomies with the aim of undertaking a comprehensive assessment of existing taxonomy standards and identifying commonalities and differences in approaches and outcomes. Together a Common Ground Taxonomy was published. This is a report resulting from an in-depth comparison of commonalities between the EU taxonomy and China’s green taxonomies. The first report covered the initial phase of work, and the project is still under development. The Common Ground Taxonomy currently covers only areas that are in the current scope of both taxonomies in terms of objectives, eligibility criteria, activities and thresholds. This means that if there are activities, objectives or eligibility criteria covered by one and not the other, they are not part of the Common Ground Taxonomy.
While the Common Ground Taxonomy for the EU and China is not finalised, the International Platform on Sustainable Finance suggests that it is a useful exercise to develop a methodology for comparison between taxonomies at a crucial time. The common taxonomy report is designed to improve the comparability and interoperability of global taxonomies.
At a time when taxonomies are being developed in a growing number of countries and regions, there is a risk of unnecessary fragmentation and confusion in the market. Comparisons and detailed analysis of sustainability metrics and methodology is important to ensure clarity and transparency between approaches and enable taxonomies to be developed based on common sustainability objectives and principles using a common language and definitions. While taxonomies between countries are unlikely to be identical, as they are addressing key concerns of different regions, having a common method for comparison is necessary to ensure that different taxonomies can be comparable, and help to scale up the international mobilisation of sustainable capital.