By Trisha Taneja on Feb 6, 2019

Global regulatory initiatives for sustainable finance will be in the spotlight this year. The European Commission’s regulatory initiatives have been the most prominent. Following on the findings of the High-Level Expert Group on Sustainable Finance (HLEG), the European Commission put together a Technical Expert Working Group on Sustainable Finance to implement some of the HLEG’s recommendations. First on its list is the creation of a green taxonomy, which is expected by the second quarter of 2019 and will be followed by a green bond standard.

Taxonomies help to create clarity on what is green or sustainable and which activities can be labeled as such. In doing so, they can help to simplify transaction costs to enter the market. A central taxonomy could be a sign of a maturing market.

However, taxonomies are also generally slow to evolve, slow to be accepted and the green bond market, while still nascent, is moving at lightning speed. Against this backdrop, adhering to strict definitions of green does not leave much room for inclusion of innovative technologies that have environmental impact, and could restrict green bond issuers from new sectors and new sustainable projects. For example, this year we saw the release of the Vodafone, Telefonica, and Verizon green bond frameworks. Information and telecommunications technology is not assessed or included in the first draft of the European green taxonomy; issuers from new sectors may always face being in limbo.

Nevertheless, regulatory initiatives have arrived, and more are on the horizon. In addition to the European Union, China has been operating with a regulated taxonomy for years and is now launching a scheme to regulate verifiers that opine against the taxonomy. Central banks globally are also considering regulation under the umbrella of the Network for Greening the Financial System (NGFS), from their own taxonomies to regulation of second-party opinion providers. Japan and Canada have also both started their own versions of HLEG that may result in regulation, likely to vary from the European outcome.

How taxonomies impact the market will depend on how they are applied. Using a central taxonomy as guidance versus it becoming mandated through regulation could be the difference between growing and limiting the sustainable finance market.

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