Leveraging Taxonomies: How Asset Managers Are Using New Sustainability Classification Systems – Part I

By Mark Uhrynuk, Alexander W. Burdulia & Nupur Agrawal on January 11, 2022

The sustainable investing market is witnessing remarkable growth: since 2018, annual cash flows into sustainable funds have increased tenfold. Now, more than ever, investors and asset managers alike seek sustainable products and strategies offering robust financial returns. The field, however, has been haunted by greenwashing claims and a lack of consistency in identifying what, exactly, makes an investment “sustainable”.

Sustainability or “green” taxonomies developed by governments, international bodies and non-governmental organizations (NGOs) can help resolve these challenges and inconsistencies by identifying specific assets, activities or projects that meet defined thresholds and metrics that quantify sustainability. These systems can cover the full spectrum of sustainability topics, from achieving acceptable levels of greenhouse gas emissions to compliance with certain human rights standards. Among other benefits, sustainability taxonomies can:

assist investors, asset managers and asset owners in identifying sustainable investment opportunities and constructing sustainable portfolios that align with taxonomy criteria;
drive capital more efficiently toward priority sustainability projects;
help protect asset managers against claims of greenwashing by providing an independent benchmark for the sustainability performance of investments; and
guide future public policies and regulations targeting specific economic activities based on taxonomy criteria.

In this series of Blog Posts, we first provide a brief overview of some of the key existing and developing taxonomies around the world. We then set out our analysis of the ways asset managers are already leveraging taxonomies in their businesses based on a review of publicly available responsible investment reports. Finally, we highlight certain challenges that asset managers may encounter as these systems develop and interest in sustainable investing continues to grow.

Continue reading this Part I for a better understanding of existing and developing taxonomies around the world. You can find Parts II and III here and here.

Global Overview

Sustainability taxonomies are currently being developed by a range of organizations and governments at a rapid pace. NGOs are particularly active in the debt finance sector, where organizations like the Climate Bonds Initiative and the International Capital Market Association have developed leading green bond standards that define specific projects eligible for sustainable debt financing. In the public sector, more broadly-applicable taxonomies are often developed by multi-stakeholder working groups mandated by national or international authorities.

Many taxonomies refer to or emulate the existing European Union taxonomy (EU Taxonomy), widely regarded as the most developed system for sustainable finance investment classification and measurement. Formally adopted in 2020, the EU Taxonomy already informs related EU regulation like the Sustainable Finance Disclosure Regulation, which requires covered entities to disclose whether certain financial products align with the EU Taxonomy.

Under the EU Taxonomy framework, an economic activity is environmentally sustainable if it contributes to one of six environmental objectives, does not significantly harm the other objectives and meets certain human rights-related “minimum safeguards”. Delegated Acts under the EU Taxonomy set out additional “Technical Screening Criteria”, or the specific thresholds and metrics used to assess whether individual economic activities are sustainable.

Numerous other jurisdictions are now developing sustainability taxonomies, while some have already put final systems in place. These jurisdictions include:

China – in May 2021, Chinese regulators announced an updated version of the Green Bonds Endorsed Projects Catalogue to help govern China’s green bonds market. The Catalogue sets out specific projects eligible for green bond financing in China. Additionally, the International Platform on Sustainable Finance, which is co-chaired by China and the EU, is developing a Common Ground Taxonomy that identifies similarities between the EU Taxonomy and the Green Bonds Endorsed Projects Catalogue. The Common Ground Taxonomy can help international investors align activities across the EU and China.
Singapore – in January 2021, the Green Finance Industry Taskforce (GFIT), a multi-stakeholder group organised by the Monetary Authority of Singapore, released its proposed framework for a green taxonomy for Singapore-based financial institutions that is generally aligned with the EU Taxonomy framework.
Malaysia – in April 2021, Malaysia launched a Climate Change and Principle-based Taxonomy that helps financial institutions assess and categorize economic activities against five guiding principles that generally align with the framework of the EU Taxonomy.
South Africa – in July 2021, the South Africa Sustainable Finance Initiative closed a consultation on a Draft Green Finance Taxonomy, including metrics and thresholds to quantify sustainability, that is largely aligned with the EU Taxonomy.
United Kingdom – the UK Green Technical Advisory Group, a multi-stakeholder organization involving the public and private sector, is currently advising the UK government on the development of a green taxonomy that will build on existing systems, including the EU Taxonomy.
France – in December 2015, France established the Green Fin Label, which certifies investment funds that meet a range of “green” criteria. The Green Fin requirements set out a list of activities, including metrics and thresholds, that support the energy and ecological transition and may qualify a fund for green labelling.
Bangladesh – in December 2020, the central bank of Bangladesh adopted the Sustainable Finance Policy for Banks and Financial Institutions, which includes a national taxonomy in the form of a list of green products, projects and initiatives eligible for green financing. The policy is based on national regulations and international standards.
Russia – in September 2021, the Russian government approved technical criteria for sustainable projects involving waste management, energy, construction, industry, transport, water supply, biodiversity and agriculture, as well as verification requirements for sustainable financial instruments. Energy criteria, in particular, are based on the EU Taxonomy.
ASEAN – in November 2021, the Association of Southeast Asian Nations (ASEAN) released Version 1 of the ASEAN Taxonomy for Sustainable Finance, the initial framework for a system that will provide a common language for sustainable finance among ASEAN member states. The environmental objectives in the proposal are largely aligned with the EU Taxonomy framework.

In Part II, we set out our analysis of how asset managers are already leveraging sustainability taxonomies to achieve a range of different objectives.