Designing a green finance taxonomy for South Africa

Johannesburg
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:

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Mapped out existing taxonomy initiatives to see what features would suit South Africa’s needs.

empower stakeholders

Facilitated discussion by the taxonomy working group and consultation with stakeholders to select the most appropriate taxonomy strategy for South Africa.

Tender

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.

Circular process

Developed a proposed process for managing future iterations of the taxonomy so that it can evolve in line with future economic activities.

Carbon accounting

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:

climate risks and impact

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.

government funding

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.

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Foster financial flows between Europe and South Africa thanks to significant (70%) alignment to the EU Sustainable Finance Taxonomy.

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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. 

 

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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.