Are green taxonomies really redrawing the map of finance?
· 10 min read
This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.
Green taxonomies are emerging as a powerful tool in the sustainable finance landscape. By classifying which assets and activities are truly sustainable, green or climate-related, they shape the flow of global capital.
With clear criteria they guide governments, investors, and financial institutions in directing financing towards impactful investments, cutting through the noise of competing definitions of ‘green’. In doing so, they create a ‘common language’ for sustainability, reducing market fragmentation and helping investors make confident choices [1]. They also facilitate the regulation of investments by providing central banks and governments with tools for transparency and accountability, underpinning green bond standards and certification [2].
Crucially, taxonomies link financial flows with global goals like the SDGs and the Paris Agreement. They steer investment towards outcomes that deliver financial returns as well as promoting environmental and social value. Effective taxonomies also reduce the occurrence of ‘greenwashing’, the creation of seemingly green or sustainable benefits that fail to exist in reality, by clearly signalling the non-financial benefits of an asset and filtering out claims that fail to stand up scrutiny [3].
Yet, their widespread adoption raises a pressing question: are green taxonomies truly changing the landscape of finance?
Taxonomies for classifying sustainable activities can be broadly grouped into three main approaches: whitelist-based, technical screening criteria (TSC) based, and principle-based. Each uses a distinct method to determine whether an activity qualifies as ‘green’, balancing different levels of prescriptiveness and flexibility.
The whitelist-based approach, used in countries such as China, Mongolia, Bangladesh, and Kazakhstan, relies on a binary classification of activities as either green or not green. This is typically done through detailed lists of projects, products, or initiatives considered sustainable, often specifying activities that contribute substantially to environmental objectives, do no significant harm, and meet minimum social and governance safeguards. These taxonomies may be supplemented by technical screening standards for certain sectors and sometimes require external review to ensure credibility.
In contrast, the TSC-based approach, adopted by the EU, South Africa, and South Korea, sets precise thresholds and rules for determining whether an economic activity can be considered environmentally sustainable. Designed to be technology-neutral, this method evaluates activities against objective criteria, either based on the final product (such as zero-emission vehicles) or the production process (for example cement or power generation). It is heavily data-dependent and usually requires third-party verification to confirm compliance.
Finally, principle or norms-based approaches, such as those in Malaysia and Japan, place greater emphasis on flexibility. Rather than fixed thresholds, they set out broad guiding principles and provide examples for classifying activities as green. This allows financial institutions to exercise judgment in assessing alignment with environmental objectives, often categorising assets along a spectrum of climate-friendliness, ranging from climate-supporting (C1) through transition activities (C2 and C3) to watchlist categories (C4 and C5). This approach reduces rigidity and supports a wider range of market practices while still guiding investment towards sustainability [4].
National-level taxonomies, such as those employed in Nepal, China, Hong Kong, and Malaysia, are developed through careful planning, consultations, and collaboration with key national stakeholders.
As a result of this process, they are tailor-made to redirect financial flows and investments towards key national sustainability goals and priorities [5]. National level taxonomies, as highlighted by Table 1 below, cover a large variety of sectors, approaches, safeguards, and principles, with varying degrees of interoperability with other national and multilateral taxonomies.
Figure 1: National level taxonomies A key advantage of a national taxonomy lies in its alignment with a country’s most urgent environmental and climate objectives.
By defining ‘green’ in a local context, governments can direct investors towards sectors and projects with the most significant impact domestically, ensuring sustainable finance supports each country’s unique pathway to its climate goals. For instance, Colombia’s green taxonomy, built on the EU framework, prioritises land-use sectors such as agriculture, forestry, and livestock, which account for the majority of its emissions. In contrast, Australia and Chile are expected to focus their green taxonomies on transitional activities in mining, reflecting their economic structures [6].
National taxonomies gain credibility and enforceability when integrated into domestic laws, regulations, and reporting requirements. China offers a leading example. Its updated Green Finance Taxonomy, published recently in July 2025, consolidates multiple guidelines into a unified taxonomy, replacing a patchwork of sector-specific guidelines. Issued by top regulators, it now applies uniformly to all types of green financial products. Overall, this reduces confusion, improves efficiency in China’s green finance market, and boosts investor confidence [7]. This example shows how national taxonomies, when implemented, serve as domestic backbones for sustainable investing.
Yet fragmentation remains a critical challenge.
By early 2025, over 30 green taxonomies existed worldwide, with around 50 more under development. Criteria often diverge, for example, some taxonomies classify transitional fossil fuel projects or nuclear energy as green, while others exclude them, creating confusion for cross-border investors and issuers.
Developing and updating taxonomies is also slow and resource-intensive, requiring technical expertise and political consensus. As a result, many remain voluntary or narrowly applied, limiting uptake, while overly strict frameworks risk deterring investment. These challenges help explain why some countries, including the UK, have paused or reconsidered their approaches [8].
Conversely, multilateral taxonomies are developed by regional bodies or groups of countries to establish shared standards across jurisdictions. The leading example is the EU Taxonomy for Sustainable Activities, a binding framework for large financial institutions and companies across member states. It defines substantial contributions to six environmental objectives and provides a common language that steers public and private capital while underpinning disclosure rules. By offering wide recognition and trust, EU-aligned green bonds attract a broad investor base. Its high-quality science-based thresholds have also influenced taxonomies globally, supporting greater market alignment.
The ASEAN Taxonomy for Sustainable Finance reflects an alternative context.
Spanning advanced economies like Singapore and developing countries with differing climate agendas, the taxonomy takes an inclusive, tiered approach. It has a principles-based foundational framework and a detailed ‘Plus Standard’ with technical screening criteria, using a ‘traffic light’ classification. This approach recognises transition activities as stepping stones, acknowledging that not all ASEAN economies can leap to zero-carbon immediately. The taxonomy has already influenced national frameworks in Indonesia, Thailand, Malaysia, the Philippines, and Singapore, embedding regional alignment while respecting domestic priorities [9].
However, reaching an agreement on technical criteria among multiple governments can be challenging.
The EU’s taxonomy emerged from years of expert consultation and political negotiation, including debates over nuclear and natural gas, making such frameworks slow to adapt as changes require broad consensus. ASEAN’s taxonomy, while inclusive, remains voluntary and depends on national adoption, limiting its harmonisation impact when uptake is partial.
To accommodate diverse interests, multilateral taxonomies may also risk lowering standards - for example, ASEAN’s amber category for transitional activities, though pragmatic, is seen by some as less stringent than stricter green benchmarks.
Beyond public-sector frameworks, private financial institutions and industry groups have developed corporate-level green taxonomies. A prominent example is the Climate Bonds Initiative (CBI) Taxonomy, a voluntary, science-based framework aligned with the Climate Bonds Standard. It has become a de facto benchmark in markets without official taxonomies, giving issuers and investors confidence that capital supports credible low-carbon projects [10].
Complementing this, the Climate Bonds Resilience Taxonomy provides criteria to classify adaptation and resilience investments across sectors, enabling investors to identify activities with measurable resilience outcomes while allowing updates as science evolves (See case study 2.1.1).
Corporate taxonomies offer flexibility: institutions can adapt criteria faster than regulators, often drawing on public standards such as the EU Taxonomy or IFC definitions while tailoring them to their risk profiles. This adaptability helped scale early green bond markets, enabling issuers to rely on recognised principles and independent reviews, even where regulation lagged [11].
However, flexibility comes with risks. Voluntary frameworks lack legal force and vary in quality, leading to inconsistent definitions of “green” and exposing markets to greenwashing concerns. Early green bonds, for instance, financed projects with significant social or environmental risks, undermining credibility [12]. Fragmentation also places a heavy burden on investors to assess multiple standards.
As markets mature, alignment with official taxonomies has increased. In the EU, companies now routinely disclose EU Taxonomy-aligned revenues and expenditures, while in China green bond issuance must follow national project catalogues. Although this reduces flexibility, it strengthens consistency, credibility, and investor trust.
It is evident that corporate taxonomies played a vital bridging role by fuelling innovation, unlocking early green finance, and shaping market practice. But their relevance increasingly depends on the alignment with national and multilateral taxonomies.
Green taxonomies are now a core infrastructure for sustainable finance, yet their global landscape remains fragmented. Divergent national and regional definitions of “green” hinder cross-border investment, increase compliance burdens, and weaken market credibility.
Yet a rigid, one-size-fits-all approach would only exacerbate these problems.
Capital markets require both clarity and flexibility. Alignment around shared principles is essential, but overly prescriptive frameworks risk stifling innovation and discouraging participation - especially where taxonomies underpin disclosure regimes [13].
An effective taxonomy model should be adaptable, dynamic and responsive to scientific needs. Harmonisation can centre on alignment around core sustainable concepts such as Paris Agreement alignment and compatibility with the Sustainable Development Goals, avoidance of environmental harm, and basic social safeguards. On top of this, jurisdictions and institutions can layer in local context or sector-specific refinements. This structure enables taxonomies to evolve with emerging climate science and to remain relevant as technologies and environmental understanding advance.
Ultimately, green taxonomies reshape finance by turning climate risk into a measurable financial exposure, revealing where capital is resilient and where it is vulnerable to transition, physical, and liability risks. Yet classification alone is not enough. Understanding these risks is essential for financial systems to act before they become systemic shocks. The next article addresses this directly, examining how markets, institutions, and policymakers can confront climate risks before they destabilise the system.
The views expressed are for informational purposes only and do not constitute financial, legal, or investment advice.
Start your journey with the Sustainable Finance Guide and explore the series reshaping how we think about money, markets and our planet. View the full guide content here.
Looking for more information on sustainable finance and what it means for your business or school? Check Globalfields' new pages here.
Curious how major companies measure up on climate? On illuminem’s Data Hub™, explore verified emissions data, net‑zero targets, and sustainability performance of thousands of firms — from industry leaders to emerging innovators.
Filip Koprčina
Energy Transition · Sustainable Investment
illuminem briefings
Sustainable Finance · Public Governance
illuminem briefings
ESG · Sustainable Finance
Green Central Banking
Public Governance · Sustainable Finance
ESG Today
Sustainable Finance · Corporate Governance
Inside Climate News
Public Governance · Sustainable Investment