1. Introduction

Scaling up financial flows in support of climate and sustainability objectives is critical. According to the 2017 OECD report Investing in Climate, Investing in Growth, investment needs for infrastructure are estimated to be around USD 6.3 trillion annually between 2016 and 2030 (OECD, 2017[1])1. Taking into account the additional needs to reach a 2°C temperature goal, the estimate increases by 10% to USD 6.9 trillion. Yet annual investments are well below this level at USD 3.3-4.4 trillion (OECD/The World Bank/UN Environment, 2018[2]).

Policy makers need to make use of a range of policy levers to help address this investment gap, to scale-up sustainable investment and to move away from unsustainable investment. These levers, which have been examined in several other OECD reports, include, but are not limited to: domestic clean energy policy frameworks, comprising core climate policies (e.g. carbon pricing, fossil fuel subsidy reform) and broader investment conditions; development of markets for green financial products; climate risk disclosures and other actions to address supply side investment barriers; the creation and strengthening of institutions and programmes to use interventions (e.g. risk mitigation) to mobilise sustainable infrastructure investment and create markets; and project pipeline preparation in the context of (sustainable) infrastructure planning. This report focuses on another policy lever which recently has received increased attention: sustainable finance definitions and taxonomies. These definitions are being developed in response to a perceived need for greater certainty on the environmental sustainability of different types of investments and economic activities. A starting point for this report is that such definitions and taxonomies are only one part of the range of policies needed to mobilise investment, but that they have significant potential to mobilise investment in the context of a broader supportive policy framework.

In recent years, investors have to an increasing extent taken actions to integrate climate change and broader sustainability concerns into their investment decisions and portfolio allocations. Diverse financial market actors have engaged in a broad range of sustainability-related initiatives within various contexts and with diverse objectives. As a result, there are many different understandings of which investments are sustainable.

As explored in more detail in this report, the multiplicity of definitions of “green” and “sustainable” investments is often cited as an important barrier to scaling up green and sustainable investment. Previous OECD analysis on green bonds notes that, “The lack of universal rules and standardisation is a shared and enduring source of concern cited by participants in the market. Convergence towards commonly accepted definitions will be essential to maximise the effectiveness, efficiency and integrity of the market.“ (OECD, 2017[3]). Differences in policies and standards relating to sustainable investments can result in market fragmentation. It is increasingly recognised that such policy and market fragmentation may constrain the financing of, and investment in, transition-compatible assets, such as renewable energy infrastructure (OECD, 2016[4]).

In view of these concerns, a number of jurisdictions have started to legislate to create official definitions of sustainable finance products. For example, the EU put forward in May 2018 a regulation on the establishment of a framework to facilitate sustainable investment. This regulation was adopted by EU co-legislators in December 2019, and published in the Official Journal of the European Union in June 2020. It is usually referred to, and will be referred to in this report, as “the EU taxonomy”. A taxonomy is a scheme of classification, and is broader than a definition. In the case of the EU taxonomy, it is a framework for defining the conditions for an economic activity to be considered as environmentally sustainable as per the EU legislation. Experts in the OECD Secretariat (Environment Directorate) have contributed to important aspects of the development of the EU taxonomy through the OECD’s participation as an observer in the European Commission’s Technical Expert Group on Sustainable Finance (TEG). The EU sustainable finance taxonomy was not the first sustainable finance taxonomy; in 2015, the People’s Bank of China issued a Green Bond Endorsed Project Catalogue, also commonly referred to as “the Chinese taxonomy”.

The analysis includes sustainable definitions from three other countries: France, the Netherlands and Japan. France has used sustainable finance definitions for several years. It created two label schemes for investment funds, the GreenFin label and the ISR (Socially Responsible Investment) label. The Dutch State also has had legislation on green loans and green funds, since 1995. These two countries have also issued sovereign green bonds, allowing for consideration of the definitions of eligible expenditure under those frameworks. Even if green bond frameworks may not constitute a legislative definition in the strict sense, the way in which a government implements sovereign green bond financing is indicative of its thinking on green finance and eligible green activities. The situation in Japan was also examined. A large actor in global financial markets outside the EU, Japan does not have a taxonomy or definitions of sustainable investments, and has not issued a sovereign green bond. However, Japan has issued a green bond framework, which is included in the mapping of definitions.

The present report focuses on these five jurisdictions for pragmatic purposes, and to allow for a detailed comparison of selected definitions and taxonomies. An increasing number of countries have developed, are developing, or have signalled interest in developing definitions and taxonomies. Subsequent work on taxonomies could aim to compare a broader set of countries. Some countries such as Canada and Kazakhstan have expressed their intention to legislate on sustainable finance definitions. In the latter case, the OECD has undertaken work on the design of a taxonomy. In addition, Indonesia, one of the countries included in OECD’s Clean Energy Finance and Investment Mobilisation (CEFIM) programme, issued a sovereign green bond in 2018. Indonesia has also developed a sustainable finance roadmap, including guidelines for banks.

The focus of this work is on legislative definitions, and as such it leaves aside all market and institution- based definitions of sustainable finance. Such excluded definitions include those used by Multilateral Development Banks, on a stand-alone basis or in association with the MDB Common Principles for Climate Mitigation Finance Tracking. The Climate Bonds Initiative (CBI)’s taxonomy is also not included, but discussed briefly in Section 1.3.2 as it plays an important role in the green bond market. This voluntary taxonomy, developed by CBI (an “international, investor-focused not-for-profit”), is applied by private issuers of green bonds seeking to receive the “Climate Bonds Certification”. In addition, this analysis excludes the many taxonomies used by large financial institutions, each of them different. However, to provide further context for legislative definitions, Part 1 includes some details on market and institutions-based definitions.

In the EU and beyond, the EC legislative action stirred a debate in the financial and regulatory community on the definitions used for identifying environmentally sustainable investments. The debate revolves around three main issues. Firstly, what is the merit of legislative action, compared with letting the financial markets use their own definitions (as they have been doing for some time)? Secondly, if legislative definitions are preferred, how should they be designed? Thirdly, given the fact that financial markets are global, is there merit in (and any constraints to) international co-ordination of definitions for environmentally sustainable investments?

This report presents elements of answers on the first two issues above. It contains an overview of sustainable finance definitions and taxonomies in the five said jurisdictions (Chapter 2 of this report), and a discussion on key issues around design and implementation (Chapter 3 of this report). Part 2 of the report presents, whenever possible, the detailed principles, metrics and thresholds used in each jurisdiction to assess compliance with a sustainable finance definition or taxonomy. A comparison by sector is provided in Chapter 4, in order to identify the sectors in which different jurisdictions’ approaches are similar, and the sectors where different approaches exist. This work could pave the way for future guidance on good practice for taxonomy design. Initial desk research done for this review suggests that in some cases the information on metrics and thresholds may not be readily accessible, for language or accessibility issues or both.

References

[1] OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264273528-en.

[3] OECD (2017), Mobilising Bond Markets for a Low-Carbon Transition, Green Finance and Investment, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264272323-en.

[4] OECD (2016), “Fragmentation in clean energy investment and financing”, in OECD Business and Finance Outlook 2016, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264257573-10-en.

[2] OECD/The World Bank/UN Environment (2018), Financing Climate Futures: Rethinking Infrastructure, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264308114-en.

Note

← 1. The 2017 report considered a scenario with 66% probability of achieving 2 degrees Celsius (based on available economic models). It is important to highlight that the Paris Agreement aims to hold the increase in the global average temperature to well below 2°C above pre-industrial levels – which likely would require even higher levels of sustainable infrastructure investment.

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