In April 2022 the National Treasury launched South Africa’s first Green Finance Taxonomy to help investors and financial institutions make more informed decisions on “green” projects.
What is the Green Finance Taxonomy?
Investors are increasingly incorporating sustainability factors, including climate change, into their investment decision-making strategies and processes. This includes stewardship activities.
This increased attention has brought about the need for more specific guidelines concerning the environmental credentials of different investments and economic activities, essentially clarifying what is considered “green”.
Green Finance or Sustainable Taxonomies have been developed globally to create a common understanding of sustainability and to reduce greenwashing, making it more difficult for companies to misleadingly label unsustainable investments as environmentally or climate friendly.
The South African Green Finance Taxonomy is a classification system that aligns with global standards while addressing local priorities. The framework presents a standardised language and approved methodologies so that certain assets, projects, activities, and sectors can be classified as “green”.
- South Africa’s Green Finance Taxonomy initiative is led by the Taxonomy Working Group under the National Treasury’s Sustainable Finance Initiative.
- A key recommendation of National Treasury’s May 2020 draft Technical Paper, “Financing a Sustainable Economy,” is the implementation of a Taxonomy for green, social, and sustainable finance that adheres to international standards, aiming to boost credibility, promote sustainable investment, and facilitate transparent monitoring and reporting.
Why is this important?
- It enables investors, issuers, and financial sector stakeholders to efficiently track, monitor, and validate the environmental credentials of their activities.
- It enables access to substantial investment opportunities in environmentally sustainable assets.
- It minimises financial risks by improving the management of environmental and social performance.
How is it implemented?
The economic activity must substantially contribute to at least one of the six environmental objectives. The environmental objectives are:
- Climate change mitigation
- Climate change adaptation
- Sustainable use of water and marine resources
- Pollution prevention
- Sustainable resource use and circularity
- Ecosystem protection and restoration
A “substantial contribution” refers to an economic activity that either significantly enhances environmental benefits or significantly diminishes adverse impacts on the environment.
The current version of the South African Taxonomy covers climate change mitigation and adaptation. Future developments of the Taxonomy will include the remaining environmental objectives.
The process of evaluating if an economic activity, asset or project is green (as defined by the Taxonomy) incorporates 7 steps described below.
References
National Treasury: South Africa’s first national green finance taxonomy launched to assist the financial sector response to climate change and support sustainable development
Old Mutual: South African Green Finance Taxonomy
OECD: Developing Sustainable Finance Definitions and Taxonomies
Sustainable Finance Initiative: South African Green Finance Taxonomy; South Africa’s ambitious green finance taxonomy
WWF: EU taxonomy: Expert report to tackle greenwashing in finance
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