Sustainable finance taxonomies are crucial for reducing emissions and achieving net zero. They define what is “sustainable” and how investments in each country align with broader environmental and social goals.
Taxonomies empower investors, companies, and policymakers to make informed decisions about allocating capital for climate action and sustainable development goals.
The encouraging news is that many countries are adopting taxonomies; the challenge is that they are too diverse to work together seamlessly.
These discrepancies create inconsistent standards that complicate investors' lives. They also hinder the creation of a new asset class that investors could recognize globally, enabling the formation of a more liquid and deep market. This would ultimately lead to better financial conditions for issuers.
Numerous national sustainable finance taxonomies exist, half of them in developing economies. However, initiatives are underway to align country guidelines at regional levels.
The Association of Southeast Asian Nations, for example, has adopted a common taxonomy that member countries are adapting to their markets. Similarly, the Working Group on Sustainable Finance Taxonomies in Latin America and the Caribbean has created a LAC common framework to support the establishment of national taxonomies that align with regional and global ambitions.
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