Following the conclusion of COP26, the most recent United Nations Climate Change Conference held in Glasgow, there is a growing urgency for the alignment of numerous taxonomies that have proliferated over the past few years to get better data and consistent regulation.

At present there are 16 green taxonomies, two social taxonomies, and three transition taxonomies under consideration, but no brown taxonomy, Natixis CIB says in a new study, The New Geography of Taxonomies.

Cédric Merle, head of the Centre of Expertise & Innovation and Green & Sustainable Hub at Natixis CIB, says: “Taxonomies have been popping up all around the world. Over 20 jurisdictions are attempting to define green, transition or social activities. Nonetheless, major discrepancies in use cases, sectoral coverage and criteria still linger. Market participants struggle to cope with such a proliferation.”

“Because of these, the harmonization of all taxonomies is important and critical to enabling better data and more consistent regulation,” Mark Uhrynuk, partner at law firm Mayer Brown, tells the The Asset in a separate interview.

Common ground

A taxonomy tries to provide a set of standards or a common ground with respect to terminology and classification for a variety of reasons. It helps regulators to regulate, and businesses to conduct their business in a sustainable fashion. Also, it helps investors make investment decisions in the face of opportunities and how such opportunities are to be treated.

In the context of the development of taxonomies in the Asean region, the publication of the Asean Taxonomy by the Asean Finance Sectoral Bodies on November 10 2021 can be seen as both positive and negative.

It is positive because compared with other taxonomies, “the Asean Taxonomy shares similar features with other major international taxonomies regarding stated goals, primary users and sector coverage, and a sectorial mapping methodology similar to the Common Ground Taxonomy. The multi-tiered approach makes the Asean Taxonomy slightly different. This ‘shaded’ taxonomy mechanism can be very helpful and relevant, although by definition more complex,” Merle tells The Asset.

The Asean Taxonomy can apply to all member-states and enable the transition of economies from high emissions to a more sustainable footing. It draws on international practices and tailors them to the specific needs of the region. It is built on solid methodologies and a good base for interoperability and comparability with other taxonomies. “We look forward to seeing detailed Plus Standard Classification and technical criteria in the future,” Merle adds.

But the Asean Taxonomy can be negative in the sense that a lot of work still needs to be done before it can be truly aligned with all the other existing taxonomies, if that is even possible.

“One of the challenges is that there are some competing taxonomies out there,” Uhrynuk says. “There’s the European taxonomy, which is probably the most developed one, and then there are country-level taxonomies, and then there’s the common-ground taxonomy, which is being developed between China and Europe.”

Different risks, opportunities

But what’s important is that at some point there must be some commonality among all existing taxonomies.

As such, the Asean Taxonomy is important because among the countries in the region, there are various levels of introduction to taxonomy. There are different points in the social and economic development of each Asean country that create different risks and opportunities for investors. At the same time, the Asean region is particularly exposed to environmental or climate-related risks.

The Asean Taxonomy also branches out beyond climate to other ESG factors such as social risks in the region.

“What is important about this is that it should promote a common language across these issues in the region and promote cross-border investment and investment into the region in a way that may not exist or make greater challenges without the taxonomy,” Uhrynuk says.