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The Green Finance Taxonomy

The publication of the Green Finance Taxonomy by the National Treasury in April 2022 (the “Taxonomy”) has asserted the commitment of the South African Government to sustainable development through the establishment of a classification tool that defines the minimum requirements for the selection of projects and sectors that are eligible for green financing.

A green finance taxonomy is defined as an official classification or catalogue that outlines a minimum set of assets, projects and sectors that are eligible to be defined as “green” or environmentally friendly. The Taxonomy has been prepared in line with international best practices while harmonising for local context. This is expected to enable financial market participants to raise low-cost funding for green activities through both the domestic and foreign markets.

The Taxonomy does not ban investments in activities not labelled “green”, but it limits which one’s companies and investors can claim are climate friendly. In order to assess whether an investment or project is considered a “green” or “environmentally friendly” initiative, the Taxonomy classifies eligible projects into two categories of environmentally aligned economic activities (i) activities that make a substantial contribution to climate change mitigation and (ii) activities that make a substantial contribution to climate change adaptation.

Once an economic activity has been categorised as either a climate change mitigation or climate change adaptation, the Taxonomy requires that the activity complies with the following principles:

• Contributes substantially towards at least one environmental objective.
• Does no significant harm to any of the Taxonomy objectives.
• Meets minimum social safeguards, in accordance relevant legislation and international standards.

Although there is no requirement for borrowers and/or lenders to disclose their taxonomy alignment, it is the intention of the Taxonomy to encourage transparency and it may be useful to apply the following process which verifies the “green credentials” of the transaction:

• Use of Proceeds: the elected green projects should provide clear environmental benefits, which will be assessed, measured, and reported by the borrower.

• Process for Project Evaluation and Selection: The borrower of a green loan should clearly communicate how it is organized to assess and select projects that will receive loan proceeds. In addition, the borrower should explain how it will manage the environmental and social risks of eligible projects.

• Management of Proceeds: The proceeds of a green loan should be credited to a dedicated account or tracked by the borrower to maintain transparency and promote the integrity of the product.

• Reporting: There should be a use of qualitative performance indicators and, where feasible, quantitative performance measures (for example, energy capacity, electricity generation, greenhouse gas emissions reduced/avoided, etc.)

With the growing demand for sustainable infrastructure development, coupled with the support from international and local stakeholders, the publication of the Taxonomy should assist to provide a regulated and standardised approach to the financing and monitoring of Green Finance transactions.

A detailed discussion of the Taxonomy may be accessed on Here

Written by V. Mulangaphuma & L. Ngwenya