Executive Summary:
In this paper, the World Federation of Exchanges (WFE) addresses the importance of transition taxonomies in mobilising capital for the economy-wide transition to net zero. Unlike green taxonomies, which identify activities already sustainable, a transition taxonomy also recognises activities that are not yet aligned but are on a credible, time-bound pathway, ensuring continued access to finance for these activities as the wider economy decarbonises.
Financing only what is already green will not deliver net zero. For investors, the transition creates both risks and opportunities: those who anticipate regulatory shifts and invest in companies adapting early are better positioned to capture long-term value and avoid stranded assets. Transition taxonomies provide the roadmap by translating high-level pledges into predictable, actionable signals that help issuers plan and investors allocate capital with confidence, alongside credible transition plans at the firm level. Achieving climate goals requires both incremental improvements and innovation in sectors not yet green, and continued investment in activities already meeting sustainable thresholds.
Transition taxonomies strengthen markets by providing:
- Predictability: signalling what counts as credible transition, helping issuers plan investments and avoid regulatory surprises.
- Comparability: standardising definitions to reduce fragmentation and support cross-border investment.
- Credibility: embedding safeguards and regular updates to minimise greenwashing and prevent transitional activities from continuing indefinitely.
Key messages
- For policymakers: The evolution of taxonomies and lessons learnt strongly suggest that any new taxonomies developed should be transition focused from the outset, rather than green. Transition taxonomies can play a vital role in linking national policy goals with corporate transition efforts and directing investment flows, but only if they are designed with credibility and usability in mind. To maximise impact, they should be science-based and regularly updated to reflect evolving technologies; include sunset clauses and phase-out timelines to prevent lock-in of unsustainable activities; progressively expand technical screening criteria (TSC) to avoid gaps and ambiguity; and be - subject to proportionate supervision to ensure comparability, credibility, and investor confidence. The paper sets out two frameworks emerging and provides case studies which highlight the policy decisions involved and their impact.
- For exchanges: By embedding the use of taxonomies, building issuer capacity, and anchoring new products such as indices and transition-linked instruments, exchanges help ensure capital markets accelerate the transition of the wider economy.
- For issuers: Transition taxonomies translate corporate transition plans into investor-relevant language, reduce financing uncertainty, and protect against greenwashing claims, while signalling seriousness and enabling continued access to capital.