Sustainable Economic Activities in the UK and Brazil: A Comparison of Classification Systems

Introduction

A sustainable finance taxonomy is a classification system that provides a common framework for defining which economic activities can be considered environmentally sustainable¹. These taxonomies are crucial tools for promoting sustainable investment and mitigating greenwashing by establishing clear criteria for what qualifies as a "green" activity. The UK and Brazil are both developing their own sustainable finance taxonomies to guide investment toward environmentally sustainable activities and contribute to their respective climate and sustainability goals. This report provides an overview of the two taxonomies, compares and contrasts their approaches, and discusses the potential challenges and opportunities associated with each.

The UK Green Taxonomy

The UK is developing a Green Taxonomy to provide a common framework for defining environmentally sustainable economic activities². The Green Taxonomy aims to create clarity and consistency over what constitutes environmentally sustainable investment for UK-regulated firms². It also aims to promote market integrity by reducing greenwashing and ensuring transparency in sustainable investment practices³. The UK Green Taxonomy is anticipated to be launched for consultation in early 2024².

The UK has progressed a wider framework of sustainable finance policies that seek to limit greenwashing and channel investment in support of the government's sustainability objectives. These aim to unlock the full potential of the financial services sector to realize the opportunities of the transition to a net-zero, climate-resilient, nature-positive economy⁴.

Objectives

The UK Green Taxonomy is initially focused on climate change mitigation and adaptation activities, but it is expected to expand over time to include other environmental objectives². The government proposes that nuclear energy should be classified as green⁵.

Criteria

The UK Green Taxonomy uses three criteria to determine if an economic activity is environmentally sustainable: ²

• Does the economic activity contribute significantly to one or more of the six environmental objectives?
• Does the activity not harm the other environmental objectives?
• Is the activity carried out in compliance with minimum safeguards?

Challenges

The UK Green Taxonomy faces several challenges:

• Usability issues: The "do no significant harm" (DNSH) criteria in the EU taxonomy have been criticized for being inconsistent and ambiguous⁶. This presents a challenge for the UK taxonomy, as it needs to ensure its DNSH criteria are clear, consistent, and easy to apply. Otherwise, it risks facing similar usability issues as the EU taxonomy.
• Interoperability: Many UK-based companies and funds are subject to overseas taxonomies, such as the EU's Taxonomy Regulation⁷. The UK taxonomy will need to be interoperable with these taxonomies to avoid confusion and complexity for companies operating in multiple jurisdictions. This requires careful consideration of how the UK taxonomy aligns with existing frameworks and how to minimize discrepancies.
• Uncertainty: The proposal to amend the UK Taxonomy periodically could lead to uncertainty in the market⁷. Investors and funds need to be confident that what is considered "sustainable" will not change significantly in the future, as this could affect their long-term investment strategies. This highlights the need for a balance between keeping the taxonomy updated and providing a stable framework for investors.

Opportunities

The UK Green Taxonomy also presents several opportunities:

• Setting a high bar: The UK has the opportunity to set a high bar globally with a rigorous, science-based taxonomy⁸. This could position the UK as a leader in sustainable finance and encourage other countries to adopt similarly ambitious standards.
• International interoperability: Ensuring alignment with well-established and common design features could create an opportunity for a UK Taxonomy to be more useful by facilitating more efficient data comparisons⁵. This would make it easier for investors to compare sustainable investment opportunities across different countries and make informed decisions.
• Differentiation: The UK may see the taxonomy as an opportunity for differentiation from the EU Taxonomy Regulation⁷. This could allow the UK to tailor its taxonomy to its specific needs and priorities, potentially creating a more effective framework for promoting sustainable investment in the UK context.

For the UK to reach its climate change goal of net zero emissions by 2050, it is estimated that the UK will need to invest an additional £50 billion into the energy transition every year into the 2030s⁹. Most of this investment will need to come from the private sector⁹. This information emphasizes the urgency and importance of the UK Green Taxonomy in mobilizing private capital for sustainable investments.

The UK has a "second mover advantage" in taxonomy development, allowing it to learn from the EU's experience and potentially improve upon its design⁶. This could lead to a more effective and user-friendly taxonomy that avoids some of the challenges faced by the EU taxonomy.

The Brazilian Sustainable Taxonomy

Brazil is developing a Sustainable Taxonomy (TSB) to classify and define the compatibility of economic activities and investments with sustainability and climate-change mitigation objectives¹⁰. The TSB is a key part of Brazil's Ecological Transformation Plan (PTE), which aims to direct financial resources to sectors aligned with the Sustainable Development Goals (SDGs)¹⁰. The TSB also provides guidelines for efficient practices in areas such as energy and land use¹⁰. The first version of the taxonomy is expected to be released by November 2024, with voluntary adoption starting in 2025/26 and mandatory adoption scheduled for January 2026¹.

Objectives

The Brazilian Sustainable Taxonomy has a broader range of objectives than many other taxonomies¹³. These objectives are organized into two main groups: climate and environmental, and socioeconomic¹³. The socioeconomic objectives include generating decent work and increased income, and reducing socioeconomic and regional inequalities¹³. The Ministry of Finance has established the following objectives as priorities for formulating the criteria: ¹¹

• Mitigating and adapting to climate change
• Sustainable use of the soil
• Conservation, management, and sustainable use of forests
• Reducing inequalities

Criteria

Economic activities are classified as sustainable if they meet the following criteria: ¹³

• Make a substantial contribution to at least one of the defined objectives
• Do not cause significant harm to any of the other defined objectives
• Comply with the minimum safeguards listed in the plan

Challenges

The Brazilian Sustainable Taxonomy faces several challenges:

• Climate crisis: Brazil is facing significant challenges related to climate change, including rising temperatures, extreme weather events, and drought¹⁴. The taxonomy needs to effectively address these challenges by promoting activities that contribute to climate change mitigation and adaptation, while also considering the potential impacts of climate change on different sectors of the economy.
• Socioeconomic inequalities: Brazil has high levels of socioeconomic inequality¹⁴. The taxonomy needs to consider these inequalities and promote inclusive and sustainable development. This requires incorporating social criteria into the classification system and ensuring that sustainable activities contribute to reducing inequality and promoting social justice.
• Dynamic nature: The taxonomy will need to be revised and expanded over time to keep pace with evolving sustainability challenges¹. This requires a flexible and adaptable framework that can incorporate new knowledge and address emerging issues in the field of sustainability.

Opportunities

The Brazilian Sustainable Taxonomy also presents several opportunities:

• Leading role: As the country presiding over the G20 in 2024 and COP30 in 2025, Brazil has a unique opportunity to take a leading role in the transition to a sustainable economy¹. By developing a comprehensive and ambitious taxonomy, Brazil can demonstrate its commitment to sustainability and encourage other countries to follow suit.
• International benchmark: The taxonomy could establish itself as an international benchmark in a range of crop, cattle, and forestry practices¹. Brazil has a wealth of experience in sustainable land use and agriculture, and its taxonomy can showcase these practices to the world, potentially influencing the development of sustainable agriculture standards globally.
• Stimulating investment: The taxonomy will be an instrument to stimulate investments that contribute to promoting productivity growth and decent jobs, addressing environmental and climate challenges, and reducing inequalities¹¹. By providing a clear definition of sustainable activities, the taxonomy can attract investment to these sectors and contribute to Brazil's economic development while promoting sustainability.

Brazil's taxonomy presents a unique opportunity to showcase its domestically developed sustainable practices in areas like agriculture and forestry¹. This can enhance Brazil's international standing as a leader in sustainable development and potentially attract investment in these sectors.

It gives strong emphasis on national specificities to address Brazil's particular challenges and priorities to meet its environmental and social objectives¹¹. This focus on national specificities makes the Brazilian Sustainable Taxonomy a potentially valuable case study for other countries with unique sustainability challenges.

Comparing and Contrasting the UK and Brazil's Sustainable Taxonomies

The Climate Bonds Initiative has supported green bond market development in many countries and regions, including Europe, the US, China, India, Brazil, and Mexico. This work has involved partnerships with governments and regulators, such as the United Nations Environment Programme, the United Nations Development Programme, the European Commission, multilateral development finance institutions, and the OECD. This information provides a broader context for understanding the development of green finance initiatives in both countries.

While both the UK and Brazil are developing sustainable finance taxonomies, there are some key differences between the two approaches. The Brazilian taxonomy is more ambitious in its scope and objectives compared to other taxonomies, including the UK's¹³.

The UK Green Taxonomy is primarily focused on environmental objectives, while the Brazilian Sustainable Taxonomy takes a broader approach that includes socioeconomic objectives. This reflects the different priorities of the two countries. The UK is a developed country with a strong focus on environmental protection, while Brazil is a developing country with high levels of socioeconomic inequality.

The UK Green Taxonomy is also expected to be implemented sooner than the Brazilian Sustainable Taxonomy. This is likely due to the fact that the UK already has a well-developed sustainable finance framework.

Finally, the UK government has proposed that nuclear energy should be classified as green, while Brazil is not expected to follow this approach. This reflects the different energy mixes of the two countries. The UK has a significant nuclear power sector, while Brazil relies more heavily on hydropower.

Overlaps and Differences in Classified Activities

There is limited information available on the specific economic activities that will be classified as sustainable in each taxonomy. However, it is likely that there will be some overlaps and differences.

Both taxonomies are likely to classify activities related to renewable energy, energy efficiency, and sustainable agriculture as sustainable. However, the Brazilian taxonomy may also classify activities related to social inclusion and poverty reduction as sustainable.

The UK taxonomy may classify nuclear energy as sustainable, while the Brazilian taxonomy is not expected to do so.

Conclusion

The UK and Brazil are both developing sustainable finance taxonomies to help guide investment towards environmentally sustainable activities. The two taxonomies have different priorities and approaches, reflecting the different contexts of the two countries. However, both taxonomies have the potential to play an important role in the transition to a more sustainable economy.

The UK Green Taxonomy has the opportunity to set a high bar globally with a rigorous, science-based taxonomy. The Brazilian Sustainable Taxonomy has the opportunity to take a leading role in the transition to a sustainable economy and to establish itself as an international benchmark in a range of sustainable practices.

The development of these taxonomies has significant implications for sustainable investment in the UK and Brazil. By providing clear definitions of sustainable activities, these taxonomies can help to mobilize private capital towards these sectors, contributing to economic growth while promoting environmental and social sustainability. Furthermore, these taxonomies can influence other countries developing similar frameworks, potentially leading to greater harmonization of sustainable finance standards globally.

The potential for collaboration and knowledge sharing between the UK and Brazil in the development and implementation of their taxonomies is also significant. By sharing their experiences and best practices, these two countries can learn from each other and contribute to the development of more effective and impactful sustainable finance frameworks. This collaboration can also strengthen international cooperation on sustainable development and contribute to achieving the SDGs.

It is important to note that both taxonomies are still under development. The final criteria and classifications may differ from the current proposals. However, the development of these taxonomies is a positive step towards a more sustainable future.

Works cited

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