Grandfathering Green Finance: Safeguard or Greenwashing Risk?

6 days ago

4 min read

Why Does Grandfathering Matter in Green Finance Taxonomy?

As sustainable finance taxonomies become more technical, more regulated and more closely linked to capital access, one policy question is becoming increasingly important: should green finance taxonomies include a grandfathering policy?

The short answer is yes — but only with discipline.

A grandfathering policy allows an existing green loan, bond, project or activity that qualified under an earlier taxonomy rule to remain recognised for a defined period, even if new criteria later become stricter.

In business terms, it is a legal certainty mechanism.

In ESG terms, it is a trust mechanism.

Without it, issuers, banks and investors may face sudden reclassification risk.

With it, the market gets time to adjust — but not permission to delay real transition.

Is Grandfathering Already Used in the Real World?

Yes. The idea is not theoretical.

In Europe, the EU sustainable finance framework has already faced this challenge as taxonomy rules, technical screening criteria and reporting requirements continue to evolve.

The European Commission’s Platform on Sustainable Finance has discussed taxonomy usability, simplification and the treatment of green bonds and green loans when technical criteria change.

One earlier recommendation specifically referred to reviewing “full technical screening criteria grandfathering” for allocated or committed proceeds within five years of issuance.

The Climate Bonds Standard is another useful market example. It operates as a voluntary certification scheme for bonds, assets and entities aligned with climate goals, and its standard and sector criteria are periodically updated.

Its current standard has continued to evolve, including Version 4.2 in June 2024, showing why transition rules are needed when labels and eligibility requirements change over time.

What Is the Latest ESG Trend Behind This Discussion?

The bigger trend is clear: sustainable finance is moving from broad “green intention” to evidence-based classification.

ASEAN Taxonomy Version 3, finalised in December 2024, introduced further details for sectors such as transportation and construction and uses Green and Amber tiers to support an orderly transition.

Its Amber category is particularly relevant because it recognises that many real-economy companies cannot move from brown to green overnight.

This matters for Asia. ASEAN is a major economic region, with the Associated Press reporting the region at about USD 3.3 trillion in combined economic size. Unlocking transition finance across such a diverse market requires credibility, but also practicality.

Where Is the Business Risk?

For companies, the risk is no longer only reputational. It is financial. If a project loses taxonomy eligibility after financing has been issued, questions may arise around investor disclosures, loan covenants, green bond reporting, sustainability-linked financing and board governance.

For banks and asset managers, the issue is equally commercial. They need confidence that today’s taxonomy-aligned portfolio will not become tomorrow’s reporting problem simply because criteria are revised without transition arrangements. This is where grandfathering becomes a business continuity tool.

But grandfathering must not become a backdoor for weak ESG claims. If the policy is too generous, it can protect outdated assets. If it is too strict, it can punish early movers. The best policy sits in the middle: transparent, time-limited and supported by disclosure.

How Should It Connect With ESG Disclosure Frameworks?

Grandfathering should not stand alone. It should be connected to recognised disclosure expectations.

Under ISSB IFRS S1 and IFRS S2, companies are expected to disclose sustainability-related risks and climate-related information that could affect enterprise value. ISSB adoption and alignment are expanding globally, with jurisdiction trackers showing growing movement toward IFRS Sustainability Disclosure Standards.

The logic is simple: if an asset is grandfathered, disclose it clearly.

Investors should know whether a green classification is based on current criteria or legacy criteria. Where relevant, companies may also align reporting with GRI for broader impact transparency, TCFD-style climate risk governance through IFRS S2, and SBTi where decarbonisation targets are involved.

The objective is not to overload reporting, but to make the green claim understandable, comparable and credible.

ISSB adoption and alignment are expanding globally, with jurisdiction trackers showing growing movement toward IFRS Sustainability Disclosure Standards.

What Would a Good Grandfathering Policy Look Like?

A credible taxonomy grandfathering policy should answer five questions:

What qualifies?

How long does it last?

What disclosure is required?

What safeguards apply?

And what happens when the period ends?

A practical approach could allow existing instruments to retain their classification for a defined period, such as three to five years, or until maturity for selected labelled bonds, provided there is no serious breach of “do no significant harm” principles.

New financing should follow the latest taxonomy criteria. Any grandfathered status should be disclosed clearly, including the original criteria used and expiry date.

What Is the Real Message for Business Leaders?

Grandfathering is not about lowering ESG ambition. It is about protecting market confidence while raising the bar over time.

For boards, CFOs, sustainability teams and financial institutions, the lesson is direct: taxonomy policy is no longer only a regulatory topic. It is a capital strategy topic.

Companies that understand taxonomy evolution early will be better prepared to structure credible green finance, avoid greenwashing risk and communicate transition progress with confidence.

The future of sustainable finance will not reward vague green promises. It will reward clarity, evidence and transition discipline.