ESG Taxomania! But Convergence On The Horizon

July 5, 2022
Sustainability experts, including a senior leader at Mastercard, have stressed the need for corporations and governments to solve the data gap that currently exists, yet warned that a common taxonomy is a long way off.

Sustainability experts, including a senior leader at Mastercard, have stressed the need for corporations and governments to solve the data gap that currently exists, yet warned that a common taxonomy is a long way off.

Taxonomies are a powerful tool for scaling up global sustainable funding and countering greenwashing.

However, the need for a common framework and more alignment between taxonomies across different jurisdictions has become critical.

“We’re talking about taxonomies like they’re some kind of unified pool, and that certainly is not the case,” said Sherry Madera, senior vice president at Mastercard and co-chair of the Future of Sustainable Data Alliance (FoSDA), which specialises in ways of improving sustainability data sets.

There are quite a lot of them out there, she continued, while speaking on a panel organised by OMFIF, a central banking and economic policy forum, where she suggested that "taxomania" is happening.

“It’s added to that buffet of language, standards, frameworks, principles, taxonomies, and my view is that we also need to focus on the building blocks that go into those systems and make sure that the data itself is really robust,” she advised.

As stakeholders ramp up their use of these tools, there must be an awareness of where capital is going, she said. “However, if we’re not getting our data sets accurate enough, we can inadvertently be adding risk into that system,” she said.

Some leading jurisdictions in the development of taxonomies have included the EU, as well as China.

The EU’s taxonomy came into force in July 2020. Now, investments by companies that operate in the trading bloc are judged by six objectives: climate change mitigation; climate change adaptation; the circular economy; pollution; effect on water; and biodiversity.

One of the problems that stakeholders are now having is trying to comply with and adhere to both the EU and China’s frameworks, she said. “Frankly, it is not an exact match, and there are 40 others that are being developed out there as well.”

“Trying to harness the power of them by trying to understand which data sets are common, and which areas are reaching across will help multinational investors with real confidence,” she said.

All hope is not lost for the future, as China and the EU are working together to develop a so-called common ground taxonomy, with the aim of promoting a commonly agreed set of green definitions that can be used by other jurisdictions in their taxonomy development process.

“This is the latest iteration of a convergent direction,” said Sean Kidney, co-chair of FoSDA.

The taxonomy is a work in progress but there is now a common language among stakeholders, he continued.

“And while we have all of these taxonomies mushrooming around the world, there is a common framework and you will see much more in common than is different,” he said, optimistically. “You can have a thousand flowers of different colours, but they are a thousand flowers.”

Even the Russian taxonomy takes a lot of influence from the EU’s taxonomy, he acknowledged.

“We can’t have a single taxonomy as we don’t have a single government of the world,” he said. “But, at least we can have more convergence.”

Taxonomies around the world are making reference to the EU’s, he said, which is not perfect but is sorting problems that once existed.

Although some have suggested that harmonisation among taxonomies is up to the private sector, Madera said that the reality is that this is still a journey for the industry to take.

“Going forward, we need at least a regional alignment on what needs to be disclosed,” she said. “Both compliance with the regulations, but also to use and to be active enablers of sustainable finance.”

Harmonisation, however, is a long way off, she argued. “What we really need to do is create interoperability from the base case, those building blocs of data.”

She continued: “How can they be multiply used? How is it that some of those data pieces are critical and are used in global taxonomies, frameworks and active management?

“Let’s make sure the data density in those building blocks is absolutely accurate and that the data density is really there for us to use,” she said.

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