The principles are based on a broader definition of climate finance which goes beyond debt instruments and captures equity financing and working capital.
GFMA (Global Financial Markets Association) and BCG (Boston Consulting Group) have published a new set of principles to facilitate the development of regional and sector-specific Climate Finance taxonomies.
Climate Finance taxonomies help enable financing by providing guidelines for investors and lenders on how ‘climate-aligned’ a company is at the entity level, or how aligned the entity’s activities are to science-based pathways.
In December, GFMA and BCG issued a report providing recommendations to facilitate the rapid development of a Climate Finance Market Structure. The need for consensus on what constitutes climate finance and for this to be translated into taxonomies was one of those recommendations.
In a new report five principles are offered as a guide to help unlock the potential of and encourage investment in climate finance. All existing and new taxonomies should be assessed against the principles, GFMA and BCG say.
The principles are:
- Climate Finance taxonomies should be broadened beyond the use of proceeds structures (e.g. green bonds) to capture entity-level activities and all eligible sources of capital.
- Climate Finance taxonomies should be objective in nature, supported by clearly defined metrics and thresholds aligned to the Paris Agreement, and science-based targets.
- Climate Finance taxonomies should have a consistent set of principles and definitions, but provide flexibility for regional and temporal variation to align with differences in transition pathways.
- Climate Finance metrics should be defined and applied to sectors using science-based targets, balancing ease of use with transparency and robustness to both assess climate impact and support third-party verification.
- Climate Finance taxonomies should be based on a governance process that is robust, inclusive, and transparent, and has the flexibility for continued evolution.
Debt instruments such as green bonds cannot alone meet global climate goals, says Kenneth E. Bentsen, Jr., CEO of GFMA and president and CEO of SIFMA. “We need a broader definition of climate finance that captures equity financing and working capital, which is not easily linked to a specific underlying economic activity.”
According to Bentsen, a consensus on global principles for how Climate Finance taxonomies are designed and capital may be invested is needed to avoid greenwashing. “In the report we offer solutions to broaden the set of eligible sources of capital in Climate Finance taxonomies, while identifying global guiding principles that support preserving the integrity and accountability in capital markets.”
The report acknowledges that there is no ‘silver bullet’ for the creation of a global taxonomy, but that a successful framework is one that recognises regional and sector-specificities.
While the principles are designed to not be prescriptive, they were developed to help spur global policymakers, standard setters, and market participants to start using a minimum set of global guiding principles and consistent definitions to underpin the development of Climate Finance taxonomies across regions.
“This will facilitate the cross border flow of financing to hard-to-abate sectors as well as global and diversified entities that operate across multiple countries, sectors, and sub-sectors,” says Allison Parent, Executive Director of GFMA.
The principles are detailed here.