Building a green taxonomy for the Gulf

Sustainable taxonomies have emerged as a critical part of the financial architecture underpinning global climate action. As governments and markets increasingly recognise the need to align capital flows with climate goals, taxonomies provide a structured way to define what qualifies as sustainable economic activity.

Although more than 60 taxonomies are now in place around the world, none of the Gulf states have yet to introduce one. The United Arab Emirates (UAE) has taken promising steps, introducing a climate law and setting an ambitious emissions target that calls for a 47% reduction by 2035. These efforts signal a broader alignment with green economy objectives.

However, while discussions around a UAE taxonomy have begun, no structured framework yet exists for the Gulf region as a whole. Establishing one could be instrumental in attracting green investment and supporting the transition to sustainable economic models.

Why taxonomies matter

With the EU’s omnibus package currently under consideration – bearing significant implications for the bloc’s green taxonomy – this is an ideal moment to assess how regional taxonomies are evolving and what lessons may guide emerging efforts, including in the Gulf.

Taxonomies play a crucial role in directing financial resources toward sustainable activities. By defining clear eligibility criteria, they increase market transparency and help governments integrate climate targets into financial regulation. They also provide a standardised language for investors, issuers and policymakers.

This function aligns directly with article 2 of the Paris Agreement on alignment of financial flows with climate-resilient development pathways and national climate goals. However, the implementation of taxonomies varies widely by jurisdiction. Key differences include whether a taxonomy is voluntary or mandatory, how it treats transition activities, and its scope in terms of financial products and sectors.

For example, most existing taxonomies remain voluntary although the EU has mandated certain disclosures. Some frameworks exclude coal entirely while others allow for transitional activities. China’s taxonomy primarily targets green bonds, whereas Singapore’s applies to financial markets more broadly including corporate disclosures and debt instruments. These divergences introduce complexities for international investors and hinder interoperability between markets.

Comparing regional approaches to taxonomies

One of the central tensions in taxonomy design is the balance between harmonisation and flexibility. Should taxonomies be globally unified or should they reflect national and regional specificities? While tailoring to the local context ensures relevance and feasibility, excessive divergence may hinder capital flows and increase compliance costs. Interoperability between taxonomy frameworks allows for smoother cross-border green investments, avoids duplication in due diligence and reduces market fragmentation.

The taxonomy developed by the Association of South East Nations (Asean) offers a good example of how to navigate this tension. Despite wide variation among Asean countries – in economic development, demographics, and environmental priorities – the region has produced a cohesive taxonomy framework. It uses a two-tiered system designed to accommodate different levels of development and economic activity . A traffic light system categorizes activities by environmental impact and sets out timelines for transition and eventual phase-out of non-aligned activities.

Importantly, elements of the Asean taxonomy are structured to overlap with the EU’s categorisation. This facilitates comparability for investors and enhances the region’s attractiveness for green capital. It is a model that proves both ambition and practicality can coexist when regional cooperation is prioritized.

In contrast, the EU taxonomy represents the most ambitious and comprehensive framework to date. Its technical precision and long-term orientation are valuable, especially in creating a rigorous standard for what qualifies as “green”. However, implementation has highlighted significant challenges. The current omnibus process has identified key obstacles to market readiness and perhaps underestimated compliance costs which has sparked debate and a strategic shift in approach.

Meanwhile, the multi-jurisdiction common ground taxonomy – a comparative exercise involving China, Singapore and the EU – presents a different but equally important model. By aligning definitions and identifying shared criteria, it addresses investor concerns over greenwashing and supports greater consistency across jurisdictions. As such, it may serve as a valuable reference for other regions when exploring their own taxonomy frameworks.

Implications for a Gulf taxonomy

The Gulf region is uniquely positioned to benefit from a shared taxonomy, drawing on Asean’s example in particular. Gulf states already maintain strong economic and financial ties and, like Asean countries, they also exhibit significant diversity in market maturity, energy dependence, economic composition and national climate targets. Any taxonomy developed for the region must accommodate these differences.

A regional taxonomy could support transition efforts across the Gulf by embedding flexibility from the outset. For instance, a traffic light classification system would allow jurisdictions to acknowledge the realities of existing energy sources while planning for eventual decarbonisation. Such a system should be paired with specific sectoral guidance and sunset clauses which provide a timeline for phasing out non-sustainable activities.

A phased approach – beginning with a high-level, principles-based framework and evolving into more technical criteria – would provide the needed structure while allowing for policy learning and capacity-building across jurisdictions.

Additionally, a Gulf taxonomy could play a significant role in supporting further development of regional green bond markets including sharia-compliant debt instruments such as sukuk which remain an important focus of the two leading economies: the UAE and Saudi Arabia.

One relevant example is Malaysia’s SRI Sukuk Framework which enables issuers to reference a national taxonomy and widely recognised international standards such as the International Capital Market Association’s Green Bond Principles. These are broadly adopted across global markets including the UAE and Saudi Arabia’s existing green bond regulations and guidelines, and are designed to accommodate a range of local, regional and international taxonomies.

A Gulf taxonomy could enhance credibility, reduce greenwashing concerns and provide a reliable foundation for scaling up sustainable and sharia-compliant bond issuance across the region.

Towards a Gulf-wide framework

A unified Gulf taxonomy could become a powerful driver of sustainable finance. If designed well, it would attract both regional and international investors, support national transition plans and enhance the Gulf’s position in the climate finance arena.

To succeed, the taxonomy should prioritise interoperability, drawing on international models and aligning with widely accepted standards. It must also be rooted in national transition plans and capable of evolving over time, offering a flexible but robust classification system.

The Asean framework illustrates how to manage ambition pragmatically. As the global taxonomy landscape continues to evolve and investors seek clarity and confidence in climate and transition finance, the Gulf has an opportunity to shape the next wave of sustainable finance tools in a way that reflects regional values and global expectations.

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