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Challenge
How can a country encourage the move to sustainable finance?
As the impacts of global social and environmental challenges unfold, there is a pressing need to build more sustainable economies. There is also increased understanding worldwide of the financial sector's role in financing innovative technologies and solutions that support the transition to sustainable, inclusive, and low carbon economies. However, how can financial institutions confidently define new categories of investments and loans that achieve meaningful environmental (‘green’), social and climate-friendly outcomes and impacts?
With the rise in demand for sustainable debt since the world’s first green bond issuance in 2007, financial sector regulators have been stepping in to encourage the market and ensure credibility. South Africa’s National Treasury established a public-private working group on sustainable finance in 2017 and published its technical paper — Financing a Sustainable Economy — in 2021. In the paper, the National Treasury expressed the need for clear definitions and guidelines consistent with international developments to provide financial players certainty of what are deemed credible green, social and sustainable investments, enable effective monitoring and disclosure of performance, and reduce the costs of competing definitions within the market.
With this in mind, the National Treasury and a taxonomy working group comprising financial sector stakeholders, with support from IFC, the Carbon Trust, and the National Business Initiative (NBI) as technical partners, set out to create a national green finance taxonomy as a first step. Through this, the National Treasury hoped to accelerate South Africa’s just transition to a sustainable and inclusive low carbon economy, prevent greenwashing, and address the country's needs while attracting international sustainable investments.
Green finance taxonomy
A catalogue that defines a minimum set of assets, projects, activities, and sectors which can be classified as ‘green’ in line with international best practice and national priorities. A green finance taxonomy helps financial players identify, track and demonstrate the credentials of their ‘green activities’. It offers a set of standards that support the move to a low carbon economy.
Solution
Designing a globally compatible taxonomy that drives investments
The National Treasury’s working group featured policymakers, regulators, industry associations, and financial players representing all parts of the financial sector, including banking, retirement, asset management, and private equity, to ensure multistakeholder oversight and guidance.
Together with the NBI, the Carbon Trust was selected to undertake a comprehensive stakeholder engagement process, conduct research on global trends in taxonomy development, and develop a draft green finance taxonomy for South Africa. As a technical partner, our goal was to create a robust and internationally compatible taxonomy. This led to five critical actions as we:
Mapped out existing taxonomy initiatives to see what features would suit South Africa’s needs.
Facilitated discussion by the taxonomy working group and consultation with stakeholders to select the most appropriate taxonomy strategy for South Africa.
Aligned the South African taxonomy to the EU taxonomy since this is a key market for South African issuers. Guided by the taxonomy working group, we updated the EU technical guidance to align with domestic policies, regulations and practices.
Developed a proposed process for managing future iterations of the taxonomy so that it can evolve in line with future economic activities.
Undertook pilot studies and developed guidance to empower financial institutions to add the taxonomy framework into their issuance processes, due diligence, portfolio monitoring, and disclosure.
Impact
Setting the financial stage for a sustainable South Africa
As South Africa transitions to a sustainable and inclusive low carbon economy, this taxonomy supports a growing market in investments that integrate environmental, social, and governance (ESG) considerations. It offers a minimum set of activities and sectors that qualify as ‘green’ supported by technical guidance, social safeguards, and requirements to ‘Do no significant harm’ to other environmental objectives. It will:
Build confidence in assessing ESG impact and risks. For example, pension providers can rely on the taxonomy to help them implement Regulation 28 to protect their clients’ retirement provision.
Increase the credibility of domestic green bond issuance and unlock foreign capital to finance the country’s just transition to a sustainable and low carbon economy.
Foster financial flows between Europe and South Africa thanks to significant (70%) alignment to the EU Sustainable Finance Taxonomy.
Help policymakers and the financial sector direct capital to finance South Africa’s social needs and climate risk response.
A springboard for other economies
There’s been much praise for South Africa’s Green Finance Taxonomy. It has encouraged other economies and offers lessons in how to tailor a taxonomy to an emerging market context. A key feature has been the comprehensive stakeholder engagement process.
The Carbon Trust were a trusted partner to understand the latest international taxonomy trends and design a solution for the South African market. They provided valuable guidance and a high standard of technical work that responded to the South African policy, regulatory, and private sector contexts with a view to attracting international investors. Working seamlessly with the National Business Initiative, the Carbon Trust engaged key stakeholders and developed practical tools to help the ultimate users of the taxonomy support a sustainable, inclusive, and low carbon economy.
Louise Gardiner
Sustainable Finance Specialist, IFC
Acknowledgement
The first phase of work by NBI and Carbon Trust consisted of stakeholder engagement and taxonomy development between June 2020 and March 2022, leading to the launch of the Green Finance Taxonomy in April 2022. This was led by National Treasury in consultation with the Taxonomy Working Group, with support from IFC, in partnership with SECO (Swiss State Secretariat for Economic Affairs) and Sida (Swedish International Development Cooperation Agency).
The second phase of work has focused on embedding the South African Green Finance Taxonomy through direct support to users, awareness raising, and the development of case studies. This is supported by the programme jointly governed and funded by the UK Government’s Foreign, Commonwealth and Development Office (FCDO) and the Department for Business, Energy and Industrial Strategy (BEIS) through the UK’s International Climate Finance.
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Now, let's discuss the concepts mentioned in this article.
Sustainable Finance:
Sustainable finance refers to financial activities that integrate environmental, social, and governance (ESG) criteria into investment decisions and promote sustainable development. It involves directing capital towards projects, companies, and initiatives that have positive environmental and social impacts while also generating financial returns. Sustainable finance aims to support the transition to a more sustainable and inclusive economy by considering the long-term risks and opportunities associated with environmental and social factors.
Green Finance Taxonomy:
A green finance taxonomy is a classification system that defines a minimum set of assets, projects, activities, and sectors that can be classified as "green" based on international best practices and national priorities. It provides standards and guidelines for financial institutions to identify, track, and demonstrate the environmental credentials of their "green activities." The taxonomy helps promote investments that contribute to a low-carbon economy and support sustainable development.
South Africa's National Treasury:
South Africa's National Treasury is a government department responsible for managing the country's finances, including budgeting, taxation, and economic policy. In 2017, the National Treasury established a public-private working group on sustainable finance to encourage the development of sustainable financial practices in the country. The National Treasury published a technical paper called "Financing a Sustainable Economy" in 2021, which emphasized the need for clear definitions and guidelines for sustainable investments and loans.
Taxonomy Working Group:
The taxonomy working group mentioned in the article is a group comprising policymakers, regulators, industry associations, and financial sector stakeholders. The group's purpose is to collaborate and provide oversight and guidance in the development of the green finance taxonomy for South Africa. The working group ensures that the taxonomy aligns with international standards, domestic policies, and market practices.
Carbon Trust:
The Carbon Trust is an organization that provides advice, support, and certification services to help businesses and governments reduce their carbon emissions and transition to a sustainable, low-carbon economy. In the context of the article, the Carbon Trust was selected as a technical partner to undertake stakeholder engagement, conduct research on global taxonomy trends, and develop a draft green finance taxonomy for South Africa. The Carbon Trust's goal was to create a robust and internationally compatible taxonomy.
EU Sustainable Finance Taxonomy:
The EU Sustainable Finance Taxonomy is a classification system developed by the European Union to define environmentally sustainable economic activities. It sets out criteria for determining whether an economic activity can be considered environmentally sustainable. The South African taxonomy was aligned with the EU taxonomy to ensure compatibility with the European market, as it is a key market for South African issuers.
Credibility and Impact:
The development of a green finance taxonomy in South Africa aims to achieve several goals. It seeks to build confidence in assessing the environmental, social, and governance (ESG) impact and risks of investments. The taxonomy can increase the credibility of domestic green bond issuance and attract foreign capital to finance South Africa's transition to a sustainable and low-carbon economy. It also helps policymakers and the financial sector direct capital towards addressing social needs and climate risks in the country.
Lessons for Other Economies:
South Africa's Green Finance Taxonomy has received praise and serves as an example for other economies. The comprehensive stakeholder engagement process undertaken during the taxonomy's development is highlighted as a key feature. The Carbon Trust, as a trusted partner, provided valuable guidance and technical work that responded to South African policy, regulatory, and private sector contexts. The taxonomy's success in attracting international investors and supporting a sustainable, inclusive, and low-carbon economy makes it a potential model for other emerging markets.
I hope this information helps you understand the concepts mentioned in the article. If you have any further questions or need more details, feel free to ask!
