08 October 2021

BIS: A taxonomy of sustainable finance taxonomies

Sustainable finance taxonomies can play an important role in scaling up sustainable finance and, in turn, in supporting the achievement of high-level goals such as the Paris Accord and the UN sustainable development goals. This paper develops a framework to classify and compare existing taxonomies.

 Several weaknesses emerge from this classification and comparison, including the lack of usage of relevant and measurable sustainability performance indicators, a lack of granularity and lack of verification of achieved sustainability benefits. On this basis, the paper proposes key principles for the design of effective taxonomies. The principles are then employed to develop a simple framework for transition taxonomies. The key policy messages of the analysis are: (i) Endeavor that taxonomies correspond to specific sustainability objectives; (ii) Encourage the development of transition taxonomies and focus alignment with the objectives of the Paris Agreement; (iii) Monitor and supervise the evolution of certification and verification processes; and (iv) Shift to mandatory impact reporting for green bonds.

Executive summary
Scaling up sustainable finance is a key element in raising private financing to support
the transition to a sustainable economy. How should taxonomies be designed to
encourage financial flows to sustainable investments and support this transition
in the most effective way?

Before delineating the crucial design features of taxonomies, it is important to
establish what taxonomies are and what they are for:
A taxonomy for sustainable finance is a set of criteria which can form the basis for
an evaluation of whether and to what extent a financial asset can support given
sustainability goals. Its purpose is to provide a strong signal to investors, and other
stakeholders, and assist their decision making – by identifying the type of information
investors need to assess the sustainability benefits of an asset and to classify an asset
based on its support for given sustainability goals.

Taxonomies can be classified along four key defining characteristics:
- Objective. Which sustainability goals are supported?
- Scope. Which activities/industries/entities are included?
- Target. How is the purpose translated into a measurable target?
- Output. What types of information are provided?

Comparing some major taxonomies across key markets for sustainable finance,
the paper finds that existing taxonomies often mix several sustainability goals and
provide output that could be more transparent and decision-useful for investors. Key
issues are the need for more use of relevant and measurable sustainability
performance indicators, a lack of granularity and lack of verification of achieved
sustainability benefits.

Based on the above findings, the paper develops five principles for designing
effective taxonomies and employs those principles to develop a basic design for
transition taxonomies – taxonomies that are in line with a transition to reduced
carbon emissions consistent with the Paris accord. The principles anticipate a rapidly
increasing amount of available sustainability-related data going forward – enabled by
increasing sustainability disclosures, collection of data from third parties, and
technological innovation in collecting these data.
Our five core principles for designing effective taxonomies are:
• Alignment with high-level policy objectives and measurable interim targets
• Focus on one single objective (“One taxonomy, one objective”)
• Outcome-based using simple and disclosed key performance indicators
(KPIs)
• Incorporation of entity-based information whenever possible
• Sufficient granularity, covering both high and low sustainability performance

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