Creating an eco-classification system for the Gulf region

The Gulf region is considering the establishment of a regional taxonomy to support the transition towards sustainable economic models and attract green investment. This move comes after significant efforts by the United Arab Emirates (UAE) to develop a structured taxonomy framework for sustainable economic activities.

The UAE's initiatives include developing sustainability standards and frameworks aligned with international best practices to support green finance and sustainable development goals. The country aims to guide investments and policy towards sustainability, while other Gulf states have not yet fully implemented their own dedicated taxonomies.

Around the world, more than 60 taxonomies are in place, but none of the Gulf states have introduced one. Discussions around a UAE taxonomy have begun, but no structured framework yet exists for the Gulf region as a whole. The implementation of taxonomies varies widely by jurisdiction, with differences in whether a taxonomy is voluntary or mandatory, how it treats transition activities, and its scope in terms of financial products and sectors.

The EU taxonomy represents the most ambitious and comprehensive framework to date, but its implementation has highlighted significant challenges. A phased approach, starting with a high-level framework and evolving into more technical criteria, would provide structure while allowing for policy learning and capacity-building across jurisdictions.

The Gulf taxonomy should prioritise interoperability, drawing on international models and aligning with widely accepted standards. The Association of South East Nations (Asean) has produced a cohesive taxonomy framework despite wide variation among its countries. A regional taxonomy for the Gulf could support transition efforts by embedding flexibility, such as a traffic light classification system and sunset clauses for phasing out non-sustainable activities.

The Gulf taxonomy should be rooted in national transition plans and capable of evolving over time, offering a flexible but robust classification system. The Gulf region, like Asean, exhibits diversity in market maturity, energy dependence, economic composition, and national climate targets.

A unified Gulf taxonomy could attract both regional and international investors, support national transition plans, and enhance the Gulf's position in the climate finance arena. The 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.

The UAE has set an ambitious emissions target of a 47% reduction by 2035. A Gulf taxonomy could support the development of regional green bond markets, including sharia-compliant debt instruments like sukuk, which are important focuses for the UAE and Saudi Arabia. Malaysia's SRI Sukuk Framework is an example of a system that enables issuers to reference a national taxonomy and international standards like the ICMA's Green Bond Principles.

The multi-jurisdiction common ground taxonomy, involving China, Singapore, and the EU, aligns definitions and identifies shared criteria to address investor concerns over greenwashing and support greater consistency across jurisdictions. The Gulf has an opportunity to shape the next wave of sustainable finance tools that reflect regional values and global expectations.

In conclusion, the establishment of a regional taxonomy for the Gulf could play a crucial role in directing financial resources toward sustainable activities, increase market transparency, help governments integrate climate targets into financial regulation, and provide a standardized language for investors, issuers, and policymakers. The Gulf region is poised to make significant strides in sustainable finance with the development of a unified taxonomy.