Addressing the ‘Winner-Takes-All’ Character of Sustainability Taxonomies

Abstract

Sustainability classification systems (or ‘taxonomies’), of which the EU environmental taxonomy is the most important example, often result in a binary approach whereby best-in-class economic activities are qualified as sustainable, while all other activities are grouped together into one catch-all category irrespective of their contribution to, or potential for, furthering the transition towards a sustainable economy.

Such binary approaches are likely to result in under-investment in both crucial transition activities and innovation with the potential to further pro-environment transition. Making taxonomies easy to apply, consistent, open to innovation and comprehensive at the same time is imperative if the world’s economies are to achieve net zero, even when this dilutes technical precision in the process. We argue in favour of expanding classification systems to include information on transition and potential transition activities, and present a scorecard approach to meet that very objective.

Keywords: taxonomies, environmental taxonomy, sustainability, ESG, rules-based approach, scorecard approach

JEL Classification: K1, K10, K2, K20, K22, 01, 010