Fixing a Broken System? Sustainable Finance Taxonomies and Global Regulatory Governance

The finance gap for climate change mitigation and adaptation highlights the insufficient capital allocation towards sustainable development and Paris-aligned objectives. The lack of a widely accepted understanding of ‘environmental’, ‘social’, and ‘governance’ leads to subjective practices, greenwashing, and lastly ineffective resource allocation. Policymakers and regulators are working on new regulations to improve ESG markets, including through the adoption of sustainable finance taxonomies that define and classify economic activities and investments based on predefined ESG performance indicators. Taking a global governance perspective, this article assesses the role of taxonomies in shaping ESG markets. The article delves into the functions and challenges of taxonomies, with a specific focus on the regulatory initiatives adopted by the EU and ASEAN, as these regional blocs are currently leading the debate on taxonomies. The article contends that taxonomies play a crucial role in bringing clarity to global ESG markets. However, their efficacy hinges on international regulatory collaboration to develop a shared understanding of their design. To achieve this, the article proposes that international regulatory cooperation should prioritise the establishment of guiding principles. This approach would strike a balance by granting states and regions the flexibility to define detailed performance indicators aligned with national priorities