What is the Green Finance Taxonomy?

The taxonomy is designed for investors, issuers, lenders, and other financial sector participants to track, monitor, and demonstrate the credentials of their green activities. The taxonomy serves as an official classification of a minimum set of assets, projects, and sectors eligible to be defined as “green” or environmentally friendly.

While the emphasis is on the environment, it also incorporates criteria aimed at ensuring the implementation of South Africa’s labour laws and policies. Taken together, the taxonomy supports South Africa’s national policy and voluntary private sector initiatives promoting sustainable finance by reducing costs and uncertainty in classifying a core set of green activities.

The taxonomy aims to unlock a number of benefits:

• Provides clarity and certainty in selecting green investments in line with international best practices and national priorities and standards.
• Helps unlock large-scale capital for climate-friendly and green investment in South Africa by increasing the credibility and transparency of green activities.
• Reduces financial risks through enhanced management of environmental and social performance.
• Reduces the costs associated with labelling and issuing green financial instruments.
• Supports regulatory and supervision oversight of the financial sector.

For each of the activities identified in the taxonomy, technical screening criteria have been developed that include both principles, as well as metrics and thresholds. The principles inform the underlying rationale for how, and whether, an activity will result in a substantial contribution or avoidance of significant harm to the environmental objective. This is then further developed by the methods in which environmental performance of the economic activity will be measured. This produces a guideline to determining whether a certain economic investment or activity is indeed green and in support of South Africa’s sustainable policies and priorities.

Not only does the taxonomy support national priorities, it is also aligned with international trends and the model adopted by the European Union. Support for the taxonomy’s development was also provided by the IFC in partnership with the Swiss State Secretariat for Economic Affairs (SECO) and the Swedish International Development Cooperation Agency (SIDA).

All of this bodes well for foreign investment in South Africa, including in the much-needed renewable energy sector, government’s REIPPPP. The timing could not be better, with Bid Window 6 having opened on 6 April 2022, aimed at bringing another 2 600Mw of wind and solar PV power to the grid as a further step in implementing the Integrated Resource Plan (IRP) and reducing South Africa’s dependency on coal and oil at a time when the petroleum industry is facing record crude prices and a greater dependency on imports following the war in Ukraine and declines in local refining and production at major South Africa’s refineries.

A copy of the taxonomy and more information on its development can be found here.

This article was originally published on Polity and FAnews.

For more information please reach out to the authors: Zaeem Soofie, CEO of Dentons South Africa and Khatija Kapdi, Candidate Legal Practitioner at Dentons South Africa.