Featured Product

    BIS Paper Sets Out Policy Actions for Design of Green Taxonomies

    October 08, 2021

    The Bank for International Settlements (BIS) published a paper that develops a framework to classify and compare existing taxonomies. The paper also identifies weaknesses that emerge from this classification and comparison and proposes five key principles for the design of effective taxonomies. The analysis in the paper concludes by setting out key policy recommendations, one of which is that authorities should aim to harmonize practices for calculating and reporting impact metrics. Furthermore, standardization of units and disclosure of computation methodologies should be encouraged and external auditing required.

    The weaknesses identified by the analyses include the lack of use of relevant and measurable sustainability performance indicators, lack of granularity, and lack of verification of achieved sustainability benefits. The key principles for the design of effective taxonomies can be employed to develop a simple framework for transition taxonomies. While certain principles, both in traditional taxonomies and in the case of climate transition finance, are intended for application over medium to longer term horizons, the paper recommends some concrete near-term policy actions:

    • Endeavor that specific taxonomies (or certification processes) correspond to specific sustainability objectives. A single taxonomy that categorizes activities or entities based on the achievement of multiple objectives, such as greenhouse gas emission reduction and social inclusion, runs the risk of increased greenwashing due to reduced market transparency resulting from complex weighting schemes to aggregate the objectives. Narrowly focused taxonomies benefit from less costly certification and verification processes. 
    • Encourage development of transition taxonomies to facilitate the channeling of funds to transition activities and increase the focus on Paris alignment. Practices and standards with respect to the reporting of climate transition plans, interim targets, and their level of alignment with Paris goals need to be harmonized further. Many institutional investors seeking to align portfolios with low-carbon transitions use environmental, social, and governance (ESG) ratings. Yet the metrics for the environmental pillar (the “E” of ESG) do not yet capture a forward-looking assessment on climate transition. In the absence of a globally accepted taxonomy, a wide range of transition terminologies and metrics exists, thus resulting in a low level of standardization across markets and jurisdictions. 
    • Monitor and supervise the evolution of certification and verification processes. To mitigate the risk of greenwashing, a high-quality and consistent verification process is critical. Supervisors and regulatory authorities should provide uniform standards of conduct for the providers of certification and verification services. Viable models for the supervision and regulation of providers of those services include those already in place for credit rating agencies in the United States and Euro area.
    • Shift from current voluntary guidelines of post-issuance reporting to mandatory annual impact and use-of-proceeds reports. The success of outcome-based taxonomies will depend heavily on the availability of more data and analysis on the impact of the classified assets or activities. To the extent that taxonomies move toward incorporating outcome-based key performance indicators (Principle 3), impact reports are likely to be a key supplementary requirement of these taxonomy, with provisions of the report best made available on at least an annual or even a higher frequency basis. Estimation of the promised impact of the projects financed by green bonds as well as ex post tracking of their achievement is greatly facilitated by mandatory uniform annual impact and use-of-proceeds reports. Use of proceeds and impact should be reported project by project, specifying the environmental impact categories while the information should be aggregable at individual bond level and by category or sector. 


    Related Links

    Keywords: International, Banking, Sustainable Finance, ESG, Taxonomy, Paris Agreement, Green Bonds, Climate Change Risk, Transition Risk, Disclosures, Reporting, Impact Reports, BIS

    Featured Experts
    Related Articles

    BIS and Central Banks Experiment with GenAI to Assess Climate Risks

    A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe

    March 20, 2024 WebPage Regulatory News

    Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures

    Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.

    March 18, 2024 WebPage Regulatory News

    Singapore to Mandate Climate Disclosures from FY2025

    Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies

    March 18, 2024 WebPage Regulatory News

    SEC Finalizes Climate-Related Disclosures Rule

    The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.

    March 07, 2024 WebPage Regulatory News

    EBA Proposes Standards Related to Standardized Credit Risk Approach

    The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU

    March 05, 2024 WebPage Regulatory News

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News

    Asian Governments Aim for Interoperability in AI Governance Frameworks

    The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.

    February 28, 2024 WebPage Regulatory News

    EBA Proposes Operational Risk Standards Under Final Basel III Package

    The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.

    February 26, 2024 WebPage Regulatory News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News
    RESULTS 1 - 10 OF 8957