South Africa’s treasury unveiled its take on a green taxonomy Friday, and regulatory authorities will move to develop “a formal regulatory instrument” by the end of 2023.
The 191-page framework, which has been under development for two years, seeks to help investors and other stakeholders assess and report on the environmental credentials of their portfolios and business activities. It was created by a working group comprising regulators, pension funds, stock exchanges and financial institutions in the country.
The project is part of the country’s Sustainable Finance Initiative, chaired by the National Treasury.
Moving forward, the Intergovernmental Sustainable Finance Working Group, which consists of regulatory authorities – including the Prudential Authority and Financial Sector Conduct Authority – will look to provide guidance on the Taxonomy.
In a statement, the Treasury explained: “This regulatory guidance will consider emerging international best practices and approaches, including work led by the International Sustainability Standards Board (ISSB).”
Vukile Davidson, chief director of financial sector policy at the treasury, said: “The direction of travel is to have a formal regulatory instrument based on the taxonomy developed and implemented domestically. We’re not at that point yet, but it’s the policy goal we hope to reach in the next 18-24 months.”
As expected, the new taxonomy is based on its European counterpart – a decision the developers said was down to the EU taxonomy’s technical approach and influence on the expectations of international investors. It identifies the same six environmental objectives: climate change mitigation, adaptation, water, pollution, biodiversity and the circular economy. It also contains minimum social safeguards and plans for social and/or transition-focused extensions.
“It’s globally compatible and aligned with the EU taxonomy – we’re not going to be on the outside looking in, but very much part of the global capital flow. Aligned with that also, we really recognise the local flavour in this taxonomy”
– Greg Fyfe, head of Sustainable Finance at Standard Bank
Speaking at the launch Friday, Caroline Wellemans, head of sustainable finance policy at the EU’s unit for international partnerships, said the European Commission was working closely with South Africa’s treasury to identify similarities and points of divergence between the two taxonomies. The findings are set to be published in the coming months.
“There is a risk that fragmented approaches to regional and national taxonomy developments introduce significant additional friction to global economic and financial systems, and the financial flows to emerging markets for sustainable development objectives,” the South African government said in a statement to mark the launch of the taxonomy. “A central premise is that, by ensuring harmonisation of environmental contribution related to economic activities defined as ‘green’, countries enable mutual recognition of taxonomy frameworks and enhance market understanding of economic activities and investment environmental performance across markets.”
However, the statement noted that different national economic, social and environmental contexts and development needs mean taxonomies must be adapted for different jurisdictions. For example, the proposed social safeguards for South Africa incorporates national laws, while the technical screening criteria has been moderated to fit South African requirements. Given the country’s current reliance on fossil fuels, the treasury is also considering the creation of a Just Transition taxonomy.
“This is going to be an important tool to mobilise global capital flows into the country for green activity,” said Greg Fyfe, head of sustainable finance at Standard Bank, which contributed to the taxonomy’s development. “Importantly, it’s globally compatible and aligned with the EU taxonomy – we’re not going to be on the outside looking in, but very much part of the global capital flow. Aligned with that also, we really recognise the local flavour in this taxonomy which takes into account more than anything our socio-economic position, as well as where the South African economy finds itself.”
Echoing his sentiment, Old Mutual Investment Group’s head of responsible investment, Robert Lewenson, told RI: “It’s got all the good stuff in there. It’s EU aligned, it’s very investable and it opens up the market for green economic growth in South Africa. Also, what’s very important is the appreciation of the social context and just transition requirements of SA, for example, in the compliance of minimum social safeguards.”