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 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.
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.
The UK Green Taxonomy uses three criteria to determine if an economic activity is environmentally sustainable: 2
The UK Green Taxonomy faces several challenges:
The UK Green Taxonomy also presents several opportunities:
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.
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.
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
Economic activities are classified as sustainable if they meet the following criteria: 13
The Brazilian Sustainable Taxonomy faces several challenges:
The Brazilian Sustainable Taxonomy also presents several opportunities:
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.
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.
|
Feature |
UK Green Taxonomy |
Brazilian Sustainable Taxonomy |
|---|---|---|
|
Scope and Objectives |
Primarily focused on environmental objectives |
Broader range of objectives, including environmental and socioeconomic objectives |
|
Implementation Timeline |
Consultation anticipated in early 2024 |
First version expected in November 2024, mandatory adoption in January 2026 |
|
Treatment of Nuclear Energy |
Proposed to be classified as green |
Not expected to follow the EU's classification of nuclear energy as green |
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.
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.
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.