Global Taxonomy Fragmentation

Why are too many taxonomies a problem? 

There is no such thing as a one-size-fits-all approach to constructing a taxonomy. Things that work well for one country, might not work for another. 

However, the issue with too many taxonomies is fragmentation, as countries are approaching them from different angles and at different speeds. This can potentially lead to taxonomy competition, splintered and inconsistent taxonomies, taxonomies that have divergent end-games, or use different language to define activities, making it difficult for international companies and investors to be omni-compliant without extraordinary effort. 

Multiple verification processes will lead to higher issuing costs and lower issuer and investor confidence. Some large asset managers and asset owners are starting to draft their own taxonomies, muddying the waters even more.

What international organisations are encouraging alignment and standardisation in taxonomy development?

In order to address these issues, international organisations are working to encourage alignment and standardisation in taxonomy development. The Taxonomy Working Group of the International Platform on Sustainable Finance (IPSF) published its second Common Ground Taxonomy report on Climate Change Mitigation in June 2022. The IPSF hopes to improve the interoperability and consistency of taxonomies around the world. Additionally, the International Organisation for Standardisation and the International Sustainability Standards Board are working on sustainability standards and the G20’s Sustainable Finance Working Group is focused on international alignment.