The European Commission’s expert group on sustainable finance recently published its final recommendations for a taxonomy of environmentally sustainable activities, which is at the heart of the European Union executive’s plan to harness the finance sector for its fight against climate change.

“For the taxonomy to work in practice, investors will need data about company or issuer performance on the taxonomy activity criteria,” the technical expert group (TEG) said.

The taxonomy aims to provide guidance for policy makers, industry and investors on how best to support and invest in economic activities that contribute to achieving a climate neutral economy.

It’s not often we get to use taxonomy to help effect global change. However, the notion of what constitutes sustainable finance, how it is measured and reported on, and what it means for financial actors around the world is rapidly evolving.

The Commission’s aim is to have a common definition or language when we’re talking about sustainable investment. The taxonomy can provide the international market with information to help it self-direct towards sustainable investment.

To enable all nations to continue to develop and for that to be a sustainable effort, the Commission is scaling up its green finance program. It aims for a quarter of the EU budget to contribute to climate action as of 2021. However, public money will not be enough. Incentives and channel private sector investments into green and sustainable development will be needed.

The new taxonomy and the increasingly sustainability-minded global marketplace it aims to inform and engage present multiple opportunities for businesses and investors alike.

Much of the impetus for driving forward the sustainability agenda comes from the governments themselves. Nearly 200 countries have committed to Nationally Determined Contributions (NDCs), which embody their efforts to reduce national emissions and adapt to the impacts of climate change.

The taxonomy sets out guidelines for identifying environmentally sustainable activities. However, it is believed that investors would benefit from greater clarity around the criteria, metrics and thresholds.

Taxonomy at its core is the practice and science of classification. Developing a taxonomy or classification system organized into conceptually similar categories can help users gain a better understanding of the taxonomy subject area. There is an art and science to organizing terms and terminology.

Melody K. Smith

Sponsored by Access Innovations, the world leader in thesaurus, ontology, and taxonomy creation and metadata application.