Understanding Green Taxonomy: A Framework for Sustainable Investments

Author: Megi Shubalidze,

Environmental Protection Manager

UN Global Compact Network Georgia

The year 2015 marked a significant milestone in global efforts toward sustainable development and climate action, with the United Nations endorsing key agreements: the Addis Ababa Action Agenda on Financing for Development, the 2030 Agenda with its 17 Sustainable Development Goals (SDGs) and the Paris Agreement. The Paris Agreement commits countries to limit global temperature increases to well below 2 degrees Celsius and strives for a 1.5-degree ceiling above pre-industrial levels. Over the next decade, meeting these commitments will be crucial in addressing the climate emergency. Mobilizing both public and private resources is essential for achieving global goals, necessitating active participation from public financial institutions, banks, institutional investors, corporations, and capital markets to ensure sustainable and green financial flows. Providing investors with information on activities that support climate change mitigation and natural resource conservation is, therefore, imperative.

Green taxonomies are classification systems that establish criteria and indicators to categorize economic activities based on their contributions to climate change mitigation and adaptation or broader sustainability goals. These taxonomies help prevent greenwashing and social washing by clearly defining what constitutes a green investment, thus providing market certainty. Developing green, sustainable, or climate finance taxonomies is foundational to creating a green financial system. The financial sector must integrate environmental considerations, particularly climate change, into their risk and opportunity analyses.

The primary objectives of green taxonomies include enhancing transparency by providing clear guidelines for what constitutes a green investment, preventing greenwashing by establishing stringent standards, mobilizing capital towards projects that support the transition to a low-carbon, sustainable economy, and supporting policy development by aiding governments and regulators in designing policies and incentives that promote sustainable economic activities.

A robust green taxonomy typically includes technical screening criteria, which are detailed requirements based on scientific assessments of environmental impact that activities must meet to qualify as sustainable. The “Do No Significant Harm” (DNSH) principle ensures that activities contribute to ecological objectives without significantly harming other environmental goals. Additionally, minimum social safeguards ensure compliance with fundamental labor rights and social standards, ensuring that sustainable activities also respect human rights and social welfare.

Green taxonomies are classification systems that establish criteria and indicators to categorize economic activities based on their contributions to climate change mitigation and adaptation or broader sustainability goals. These taxonomies help prevent greenwashing and social washing by clearly defining what constitutes a green investment, thus providing market certainty.

The European Union (EU) has developed one of the most comprehensive green taxonomies, which came into force in 2020. It classifies activities that make a substantial contribution to six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The EU taxonomy provides detailed technical screening criteria for each objective, ensuring only genuinely sustainable activities are classified as such.

In line with global trends, Georgia has developed its sustainable finance taxonomy through the National Bank of Georgia in collaboration with local and international experts and stakeholders. This initiative is a significant step for Georgia in promoting green investments and integrating environmental considerations into its financial systems. The taxonomy’s categories and technical criteria adhere to international best practices while incorporating characteristics specific to the national economy, ensuring its credibility both locally and internationally.

The Georgian Green Taxonomy aims to guide investments by providing a framework for identifying and funding sustainable projects. It promotes transparency by ensuring clear and consistent criteria for what constitutes a green investment and combats greenwashing by establishing specific standards to prevent misleading claims about environmental benefits. Additionally, it supports policy development by assisting policymakers in creating incentives and regulations that promote sustainable economic activities and enhance competitiveness by positioning Georgia as a leader in green finance within the region.

The Georgian Green Taxonomy includes several key components, each tailored to the country’s environmental and economic context. These components encompass detailed, sector-specific technical screening criteria that activities must meet to be classified as sustainable, covering areas such as energy efficiency, renewable energy, waste management and sustainable agriculture. Activities must contribute to at least one environmental goal, such as climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, or protection and restoration of biodiversity and ecosystems. The DNSH principle ensures that activities contributing to one environmental objective do not cause significant harm to other objectives, while social and governance safeguards ensure compliance with social standards and good governance practices.

The Georgian Green Taxonomy focuses on several key sectors critical to the country’s sustainable development. This includes promoting renewable energy projects such as solar, wind, and hydropower, along with energy efficiency improvements in existing infrastructure. Sustainable farming practices that reduce environmental impact, such as organic farming and water-efficient irrigation systems, are encouraged, as are sustainable forest management practices that enhance carbon sequestration and biodiversity. The development of recycling facilities and waste-to-energy projects is fostered, along with advancements in low-carbon transportation options, including electric vehicles and public transit improvements.

Implementing the Georgian Green Taxonomy involves establishing a regulatory framework to enforce taxonomy criteria and ensure compliance, building capacity through training financial institutions, businesses and policymakers on the application of the taxonomy and developing mechanisms for tracking and reporting the impact of green investments.

While the EU’s green taxonomy sets a benchmark, other countries are developing their frameworks. For instance, China has the Green Bond Endorsed Project Catalogue, and countries like Canada and Japan are working on their versions. Developing a universally accepted green taxonomy poses challenges, such as regional differences in environmental priorities and economic structures, making a one-size-fits-all framework difficult. Reliable and comparable data is essential for assessing the sustainability of activities, yet it remains a significant challenge. Ensuring consistency and interoperability between different taxonomies is crucial to prevent market fragmentation and facilitate international investment flows.

Effective implementation of green taxonomies requires the active participation of various stakeholders. Governments and regulators play a pivotal role in developing, enforcing, and periodically updating taxonomy frameworks. Financial institutions need to incorporate taxonomy criteria into their investment decision-making processes and reporting. Corporations should align their operations with taxonomy standards and enhance transparency in their sustainability practices. Investors must use taxonomy guidelines to identify genuinely sustainable investment opportunities and avoid greenwashing.

Effective implementation of green taxonomies requires the active participation of various stakeholders. Governments and regulators play a pivotal role in developing, enforcing, and periodically updating taxonomy frameworks. Financial institutions need to incorporate taxonomy criteria into their investment decision-making processes and reporting. Corporations should align their operations with taxonomy standards and enhance transparency in their sustainability practices. Investors must use taxonomy guidelines to identify genuinely sustainable investment opportunities and avoid greenwashing.

Green taxonomy is a critical tool in the global transition toward a sustainable economy. By providing clear definitions and criteria for sustainable activities, it helps mobilize capital toward projects that contribute to environmental goals, enhances transparency and combats greenwashing. As more regions develop and implement their taxonomies, these frameworks will hopefully harmonize, creating a cohesive global approach to sustainable finance. This unified effort will drive significant progress in combating climate change and environmental degradation. The Georgian Green Taxonomy represents a crucial step in Georgia’s journey toward sustainability, supporting national environmental goals while contributing to the broader global effort.