Harmonising global green taxonomies

WASHINGTON, DC — Football (soccer) has been around for centuries, but it did not always look like the game we know today. It did not even look the same across geographies. In some places, players were allowed to use their hands, while in others, goals did not have a crossbar; still elsewhere, pushing an opponent was allowed, though pulling was not. But in the mid-nineteenth century, the rules were standardized, so that teams from different places could compete against one another. With that, football began to expand and develop rapidly. Today, it is the world’s most-played sport.

Just as shared rules enabled football’s development, a single set of guidelines would accelerate progress in the fight against climate change. The logic is straightforward. Given the scale of the climate challenge, addressing it requires action at all levels of society, government and the economy. If such a huge number of actors are to work, worldwide, toward a common goal, often through direct collaboration, everyone must operate according to the same principles, define terms and concepts in consistent ways, and measure progress using established metrics.

This is particularly important for the financial sector. If investors are to have enough confidence and clarity to direct trillions of dollars toward the highest-impact projects, they need access to a shared set of criteria for assessing the “green credentials” of assets and activities.

At the country level, “green taxonomies” are already having an impact. The year after China published its first “project catalogue” for green bonds in 2015, the value of its green-bond market surged from zero to $40 billion. But there is a limit to what national action can achieve. Since different jurisdictions define their own standards and metrics, what qualifies as “green” in one country might still be considered “brown” in another, creating uncertainty for investors and undermining their confidence.

The lack of a single shared green taxonomy also fragments the market, creating opportunities for firms to circumvent rules and regulations aimed at boosting sustainability. For example, if a government imposes strict rules on carbon emissions, companies might simply move their high-emitting activities abroad or start importing carbon-intensive goods manufactured in more lenient jurisdictions.

Of course, it would be unrealistic — and unfair — to expect all countries to adopt a single green taxonomy immediately. Each country has its own needs and priorities, faces particular economic and development challenges, and possesses a unique set of resources with which to achieve its goals. Their green taxonomies must reflect this. For example, Colombia places special emphasis on agriculture, livestock, and forestry – economically vital sectors that are also leading sources of greenhouse-gas emissions and major drivers of environmental degradation.

Again, football can offer some clarity here. While the rules are the same everywhere, leagues around the world operate in different ways, reflecting local conditions. They have different budgets, calendars, and rules for promotion and relegation of teams from one division to another. Ultimately, however, players can move across leagues, and teams can compete across jurisdictions, with relatively little friction.

This kind of interoperability must be built into national green taxonomies, to enable green capital to flow across borders at scale. To this end, policymakers and regulators must identify common design features, align impact metrics and accounting standards, and embrace an “adopt or adapt” approach to the rest, borrowing templates or criteria from others and adjusting as needed.

Several initiatives aimed at supporting this process are already underway. In 2021, the International Financial Reporting Standards Foundation created the International Sustainability Standards Board, an independent, private-sector body that develops and approves sustainability reporting standards. The G20 has defined six high-level principles to guide jurisdictions as they develop their own approaches for aligning investments with sustainability goals, thereby helping to ensure comparability and interoperability. And the Sustainable Banking and Finance Network provides its 86 members in 66 emerging-market countries with toolkits and progress reports.

Once national rulebooks are created, regional harmonization must follow. Here, too, positive steps are already being taken. The Working Group on Sustainable Finance Taxonomies for Latin America and the Caribbean, with the support of the International Finance Corporation and other multilateral institutions, is helping countries in the region align their frameworks, such as by establishing guiding principles and designing objective classification systems for sectors and activities. Regional forums like Asia-Pacific Economic Cooperation (APEC) should also step up, incorporating the harmonization of green taxonomies into broader integration plans.

The final step is global harmonization, which the G20 is well-positioned to lead. Brazil should attempt to kick-start the process during its presidency of the group this year, setting the stage for further progress under South Africa’s leadership in 2025. Unlike the evolution of football, which took over a century and a half, we do not have the luxury of time. To tackle climate change, a global green taxonomy cannot come soon enough.

Copyright: Project Syndicate, 2024. www.project-syndicate.org