EM taxonomies ‘will likely be adapted to local conditions’

Meanwhile, GTAG member says it ‘seems impractical’ for UK's taxonomy to be in force by January deadline.

National taxonomies in emerging markets will likely diverge from established EU and international standards in order to adapt to local economic circumstances and contexts, experts have warned.

Mariana Escobar Uribe, an adviser at the Colombian regulator responsible for its green finance and climate risk strategy, highlighted the country’s own taxonomy as an example. Speaking at the Climate Bonds Initiative’s conference in London on Thursday, she said the Colombian taxonomy – the first in Latin America – drew from the EU version but was “adapted to local contexts, policies, programmes and commitments”.

Uribe pointed to the land use sector in Colombia, which is responsible for much of the country’s GHG emissions, as an example of local differences. “What we saw from international taxonomies was that what was being done for land use did not apply to the Colombian context,” she said.

The team developing the taxonomy also had to take into account available data and local regulations when developing the technical screening criteria and the “do no significant harm” principle.

Uribe expects that this will be the case with other taxonomies being developed in similar countries. “In the Colombian case, and I feel it’s going to be the case in some emerging markets, there is going to be a mixture between developing something for certain sectors in order to respond to the local context, but also adapting to more traditional sectors such as energy, construction or transportation.”

Nadia Humphreys, business manager for sustainable solutions at Bloomberg, told Responsible Investor that some of the standards in the EU taxonomy “are problematic for emerging economies”.

Humphreys – who is a member of the UK government’s Green Technical Advisory Group (GTAG) and co-rapporteur for the EU’s platform on sustainable finance – highlighted a report published last week by the platform. This included a recommendation that the European Commission collaborate with the UN High-Level Expert Group on scaling up sustainable finance in low and middle-income countries in order “to understand proportionality of the EU rules for still attracting capital into emerging economies”.

The report also said that the International Platform for Sustainable Finance should shape the general principles all taxonomies need to abide by in order for equivalence to be granted.

Diverging taxonomies between different jurisdictions are expected to lead to higher compliance and transaction costs for financial market participants. A summary of the advice published earlier this month by GTAG warned that deviating too far from EU standards would create “extra costs and disincentives for international investors” and that this was likely to be passed on to beneficiaries.

The GTAG advice was published shortly before a period of political turmoil in the UK, which will soon elect its third prime minister this year. With continued delays to the taxonomy regulation, which is meant to come into force in January this year, Humphreys warned that it seems “impractical that we would have a public consultation and pass the UK taxonomy through the political process to have it finalised for January”.