Introduction to ESG Taxonomies

Why do we need taxonomies if we want to achieve net zero? 

Governments around the world have set ambitious goals to achieve net zero emissions by 2050. However, realising these targets requires not only political will but also the creation of credible pathways and laws that incentivise and mobilise the necessary capital to drive progress. 

Taxonomies play a crucial role in this effort by providing a clear definition and classification of what constitutes a sustainable or "green" economic activity. This helps to create the necessary incentives for governments, banks, and investors to channel trillions of dollars towards emissions reductions, transition, and social betterment.

What are taxonomies intended to achieve? 

Taxonomies are intended to achieve several key objectives:

• Provide substance to policy frameworks and climate legislation by defining what constitutes a sustainable economic activity and what does not
• Create incentives for governments, banks, and investors to channel trillions of dollars of capital towards emissions reductions, transition, and social betterment. This is the overarching objective of a taxonomy
• Drive a reset of the global economy and create millions of green, social, and sustainable jobs by providing a strong signal to investors and other stakeholders and assisting their decision-making

How should taxonomies be developed? 

Taxonomies should be developed in a way that aligns with policy frameworks and addresses the specific challenges and opportunities of a country's economy. Many governments have found that binary taxonomies, which push investors towards projects that are already low carbon, can limit the transition away from high carbon-emitting activities. Instead, governments should create incentives to channel capital towards activities that are light green or brown to reduce their emissions footprints according to formal transition pathways. 

Taxonomies will evolve over time to drive better outcomes.