Leakage in the Common Ground: How Misalignment in Sustainable Finance Taxonomies Impacts Cross-Border Capital Flow

23 Pages Posted: 14 Apr 2023 Last revised: 6 Aug 2023

See all articles by Keith Jin Deng Chan

Keith Jin Deng Chan

The Hong Kong University of Science and Technology

Lionel Wilson Mok

Hong Kong University of Science & Technology (HKUST)

Peter Chi Choi Lau

Hong Kong University of Science & Technology (HKUST)

Date Written: March 31, 2023

Abstract

There is an urgent need to direct capital towards climate change mitigation in emerging markets. To enable this, developed countries can endorse the common ground between their taxonomies and those in emerging markets while potentially creating policies and investment incentives to guide global capital in that direction. However, little is understood about the impact which taxonomy misalignment may have on the effectiveness of endorsing the taxonomies of emerging markets. In response, we analyze how misalignment can occur between taxonomies and construct a micro-economic model, to show that four ratios (green bond price ratio, supply elasticity ratio, taxonomy misalignment ratio and preferential treatment ratio) should be considered to ensure the policy is not counter-productive to climate change mitigation.

Keywords: Green finance, sustainable finance, common ground, taxonomy, misalignment, leakage, cross-border capital flow

JEL Classification: G15, G18, F35, F42, Q50

Suggested Citation

Chan, Keith Jin Deng and Mok, Lionel Wilson and Lau, Peter Chi Choi, Leakage in the Common Ground: How Misalignment in Sustainable Finance Taxonomies Impacts Cross-Border Capital Flow (March 31, 2023). Available at SSRN: https://ssrn.com/abstract=4398664 or http://dx.doi.org/10.2139/ssrn.4398664

Lionel Wilson Mok

Hong Kong University of Science & Technology (HKUST) ( email )

Peter Chi Choi Lau

Hong Kong University of Science & Technology (HKUST) ( email )

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