Sustainability Taxonomies: Leveraging the potential and avoiding the pitfalls
Sustainability taxonomies are emerging as a regulatory centerpiece for defining and classifying what activities are deemed sustainable. Getting this right will be pivotal to realizing the world’s sustainable development ambitions.
This paper was prepared by Deloitte in collaboration with the World Business Council for Sustainable Development (WBCSD). It is in direct response to an increasing requirement among many companies to understand sustainability taxonomies, their emergence, implementation requirements and the challenges and opportunities they present.
As two global organizations committed to supporting the world’s shift towards a sustainable future, Deloitte and WBCSD agree that more work is needed to ensure we collectively realize the benefit of sustainability taxonomies globally. In response, this paper is the first in a three-part Harnessing sustainability taxonomies series on how sustainability taxonomies can help realize global sustainable development objectives. The series focuses on the critical role companies play in helping to deliver the sustainable economic outcomes sought by sustainability taxonomies.
The rapidly emerging global landscape of sustainability taxonomies
In just a matter of a few years, the global landscape of sustainability taxonomies has gone from zero to over 50 instruments (finalized and emerging). This rapid emergence of sustainability taxonomies has been primarily driven by a growing need for clarity and consistency in what is considered a sustainable economic activity.
While the sheer volume of sustainability taxonomies emerging is daunting, most taxonomies are consistent in how they provide a clear scope, approach, objectives, eligibility, and performance criteria. Understanding these five components helps to clarify purpose and expectations, which is a critical first step for companies seeking to align their operations with taxonomy requirements.
Scope: Sets a clear scope, which can vary from being economy-wide to more industry or sector-specific.
Approach: Clarifies the intent and any guiding principles, which can vary from being prescriptive to principles-based.
Objectives: Provides objectives that can specify scope and intent, and aligned sustainability outcomes.
Eligibility: Specifies how an objective-aligned activity is deemed eligible or ineligible.
Criteria: Outlines any performance criteria for meeting eligibility.
Furthermore, it is critical for companies to understand that sustainability taxonomies are enabling tools for supporting sustainability reporting. Sustainability taxonomies are not standalone instruments or in the case of mandatory taxonomies, additional regulatory burdens. They are seeking to enhance market conditions and confidence within a broader regulatory framework by helping to reduce greenwashing and increasing transparency.
To help make sense of the current global landscape of sustainability regulations, there are some key observations for companies to consider:
As the global landscape of sustainability taxonomies continues to evolve and take shape, Deloitte has identified seven emerging trends that companies should keep watch of:
- Narrowing of scope: The scope of sustainability taxonomies is increasingly narrowing to target high impact sectors, particularly heavy emitting sectors.
- Divergence in approach: There is a global divergence in approach based on being prescriptive versus principles-based taxonomies, which will have ramifications for how companies align.
- Broadening of objectives: The inclusion of social objectives into taxonomies will likely increase globally, particularly in emerging markets.
- Transition integrity challenges: Tensions in aligning eligible transition activities with long-term targets, and how these can help deliver national commitments.
- Global fragmentation concerns: In the absence of a coordinated approach or global baseline, a proliferation of sustainability taxonomies is likely. This makes it increasingly difficult to draw global alignment or interoperability among sustainability taxonomies.
- Increasing mandatory status: There is a global shift towards mandatory sustainability taxonomies.
- Implementation deficit: Companies are struggling to align with sustainability taxonomies.
While it is still early in the roll-out process of many first phase sustainability taxonomies, market implementation challenges (issue and opportunity-based) are becoming evident. Key issues identified include non-interoperability, data collection and reporting, adaptability in market, limited clarity on interpretations, narrow focus on some of the most challenging sectors and difficulty to align with qualitative principles.
What is clear, is that there are many financial, reputational, and operational benefits on offer to companies if the market conditions for implementation are right. There are several practical actions discussed in the paper that companies can consider now to help prepare for sustainability taxonomy alignment or improve current implementation. These practical actions include using relevant sustainability taxonomy frameworks to get alignment with company sustainability strategies, product and service development, risk management, compliance, reporting, research and development agenda, alliances, and supply chain innovation.
To learn more, read the full report.
Global Dialogue Series
Deloitte will be holding a global dialogues series across multiple areas, with an emphasis on how to fully utilize sustainable taxonomies. Please reach out to Georgia Gifford if you would like to participate.
