ICMA Publishes ‘Success Criteria’ for Sustainable Finance Taxonomies

In a new whitepaper, ICMA compares the main features and methodologies of official taxonomies and provides five success criteria for use in benchmarking.

ICMA (International Capital Market Association) has published a new paper on taxonomies for sustainable finance, seeking to promote a better understanding on their use and provide a set of ‘success criteria’ to allow for benchmarking of taxonomy initiatives.

“There have been both market and official sector initiatives to develop ‘taxonomies’ (classification systems) in an effort to provide clear guidance on which activities, assets and/or projects qualify for sustainable finance, and more widely in some cases as sustainable for regulatory or prudential purposes,” ICMA says.

The new publication summarises the various approaches that have been taken as well as the different objectives that are being pursued.

It also compares the main features and methodologies of official taxonomies from the EU, China and other national authorities as well as influential market-based systems including the Green Bond Principles’ project categories.

The paper is aimed at helping market participants and service providers better understand and use existing taxonomies, and to provide the official sector with proposed success criteria to benchmark current and future taxonomy initiatives.

The key success criteria proposed by the paper recommend that taxonomies should be:

  • Targeted in their purpose and objectives, with appropriate guidance on use for specific purposes, i.e. for classification, financial product qualification,
    disclosure, risk assessment, or regulatory purposes
  • Additional in relation to existing international frameworks, which should be referenced as much as possible to avoid duplication of cost and effort
  • Usable by the market for all intended purposes, by providing clarity on both the embedded methodology, how to implement it, which parties are responsible, and how classification is done at the business group level, legal entity or company level, project level, or by individual activities
  • Open and compatible with complementary approaches and initiatives, such as those used by the TCFD, Science Based Targets initiative (SBTi), and Transition Pathway Initiative (TPI)
  • Transition-enabled and incorporating trajectories and pathways, by encouraging the use of taxonomy thresholds and metrics for forward looking targeting by companies and embedding realistic future trajectories/pathways for companies to reach the identified sustainable technical thresholds, for instance

“It should be understood that identifying what is green and sustainable today is arguably less important than shedding light on pathways and trajectories to sustainability,” the paper says.

“The real challenge is enabling the market to finance the transition rather than unintentionally restricting it to what is already considered exemplary.”

The whitepaper is available here.

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