Negative or exclusionary screening remains the most widely applied Environmental, Social, and Governance (ESG) strategy in the financial sector. However, there is no standardized approach to ESG exclusions due to variations in criteria and differences in data. Hence, a taxonomy could support a more standardized approach to the exclusion policies and assess transition risk in the balance sheets of financial institutions. The taxonomy could also separate the financing impact between excluded and non-excluded entities and transactions.
The unsustainable taxonomy could inform how banks and investors treat other fossil fuels or activities considered environmentally harmful in their exclusion policies. Besides, it could encourage better disclosure of business activities outlined in the taxonomy, leading to more consistent data and support standardized screening approaches. Many large active investors are likely to use these disclosures as a starting point for deeper engagement.
Unsustainable or Brown taxonomy has gained support from financial market regulators. The approach is far closer to orthodoxy in financial regulation and possibly mitigate long-term transitional or physical climate risks in the interests of financial stability.
The application of an unsustainable taxonomy could have wide-ranging implications, including deterring private finance from brown activities towards those that are supportive of a low-carbon transition and resilient to climate-related risks (both physical and transitional).
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