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BIS Outlines Principles for Designing Effective Taxonomies

The principles for sustainable finance taxonomies will facilitate comparability and interoperability across firms and markets, says bank.

The Bank for International Settlements (BIS) has published a paper in which it proposes a set of standard principles for the design of effective sustainable finance taxonomies after finding shortcomings in existing taxonomies.

Sustainable finance taxonomies can play an important role in scaling up sustainable finance and supporting the achievement of high-level goals such as the Paris Accord and the UN Sustainable Development Goals (SDGs), the paper says, providing a framework for classifying and comparing existing taxonomies.

“Several weaknesses emerge from this classification and comparison, including the lack of usage of relevant and measurable sustainability performance indicators, a lack of granularity and lack of verification of achieved sustainability benefits,” the paper says. “On this basis, the paper proposes key principles for the design of effective taxonomies.”

Five core principles are outlined in the paper:

  • Alignment with high-level policy objectives and measurable interim targets
  • Focus on one single objective (“One taxonomy, one objective”)
  • Outcome-based using simple and disclosed key performance indicators (KPIs)
  • Incorporation of entity-based information whenever possible
  • Sufficient granularity, covering both high and low sustainability performance

Taxonomies that follow these principles can help to provide clarity to investors and other stakeholders about the sustainability benefits of a given asset, and “greatly facilitate” their comparability and interoperability across different firms and markets, the paper says.

The paper also sets out policy actions that could be taken to increase the information value and the effectiveness of existing taxonomies in channelling financial flows to more sustainable investments:

  • Endeavour that taxonomies correspond to specific sustainability objectives
  • Encourage the development of transition taxonomies and focus alignment with the objectives of the Paris Agreement
  • Monitor and supervise the evolution of certification and verification processes
  • Shift to mandatory impact reporting for green bonds.

The paper also says standardisation of units and disclosure of computation methodologies should be encouraged, external auditing should be required, and practices for calculating and reporting impact metrics should be harmonised.

The full paper is published here.

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