Climate action: South Africa’s financial sector can now track green activities

The country’s first green finance taxonomy was released following a two-year consultation process.

  • South Africa has its first green finance classification system to help track and monitor green activities in the sector.
  • The taxonomy would be beneficial in attracting more climate-friendly investments to the country.
  • It took two years of preparation and aligns with international trends.

Investors, lenders and other financial industry players can now track and monitor their green activities through the country’s first green finance classification system, launched on Friday

The taxonomy or catalog is part of the country’s Sustainable Finance Initiative chaired by the National Treasury. This launch follows a two-year consultation process by the Taxonomy Working Group which includes ministries such as the National Treasury and the Ministry of Forestry, Fisheries and Environment. It includes the Reserve Bank Prudential Authority and other industry players such as the Financial Sector Conduct Authority and the Banking Association of South Africa.

The green finance taxonomy defines the minimum set of assets, projects and sectors deemed “green” or environmentally friendly, the Treasury said in a statement. Taxonomy was one of the recommendations of National Treasury Technical Document, Financing a sustainable economy.

The taxonomy, which reflects national priorities, is aligned with global trends. The EU taxonomy for sustainable activities was launched two years ago – as part of efforts to achieve climate and energy targets for 2030 and is aligned with the European Green Deal.

According to the Treasury, the taxonomy takes into account the EU model to identify activities that contribute to six environmental objectives. These are climate change mitigation and adaptation, sustainable use and protection of water and marine resources, sustainable resource use and circularity, pollution prevention , protection and restoration of ecosystems.

Taxonomy has several advantages. It will unlock large-scale capital and climate-friendly investments in South Africa, as it creates transparency on green businesses and builds their credibility. It also contributes to reducing financial risks through better management of environmental and social performance. The taxonomy will reduce the costs associated with labeling and issuing green financial instruments. It also supports regulatory oversight of the financial sector.

The taxonomy will be treated as a living document to be updated and developed over time. Market participants should use the taxonomy as it is developed.

The Prudential Authority and the Financial Sector Conduct Authority will provide oversight and regulatory guidance.

“These regulatory guidance will take into account emerging international best practices and approaches…” the Treasury said. Investors and other market participants can use the taxonomy to stay informed about a company’s sustainability risks, which will help them make informed decisions.

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