Enhancing Market Transparency in Green and Transition Finance

This report from the Network for Greening the Financial System examines the issue of market transparency for green finance. It reviews the current practices and key challenges involved in taxonomies, green external reviews, and climate transition metrics and frameworks.

A fragmented global landscape with many different green taxonomies highlights the need for greater comparability and interoperability across jurisdictions, the study finds, with design challenges facing those developing taxonomies for emerging and developing markets. While the survey shows that most central banks and financial supervisors are either using or considering the use of taxonomies, it also identifies a growing interest in weaker “transition taxonomies”.

The report describes how green external review and assessment is currently dominated by private sector operators offering a range of different approaches, including second-party opinions, third-party certifications, ESG ratings, assurance, and audit services.

“The market calls for standardisation of impact reporting,” it says, and there is a growing demand for impact assessments to be expanded beyond the activity level to cover the overall impact of an issuer’s business model.

The report also reviews a range of transition frameworks emerging to help assess issuers’ awareness of climate transition risks, ambition and readiness to decarbonise, along with project governance and strategy, and medium and long-term science-based net-zero targets. Progress is being made to develop market products to help scale up investments in support of climate transition, it says, but challenges remain.

“Funds and exchange-traded funds labelled as climate solutions, low-carbon, climate-conscious, and clean energy differ widely in terms of how they measure emissions and carbon intensity,” the authors warn. “Given that the strategy of a significant portion of asset owners and managers is to invest in climate transition, greater monitoring, verification,and engagement strategies are necessary to ensure that issuers are held accountable to achieve decarbonisation against their targets.”

The report concludes with recommendations to enhance market transparency surrounding green and transition objectives, and to facilitate comparability and interoperability of taxonomies, frameworks, and principles. It also calls for regulators to redouble future efforts on disclosure and reporting, identifying global baseline disclosure standards with industry-specific activity metrics as an “essential complement” to effective taxonomies and external review.

Based on a survey of 25 central banks and 24 financial supervisors, the document includes extensive appendices outlining country and regional experiences in each of the three areas examined.