Based on what we saw in G5 at Sunny's lighthouse. From what I can guess, this flag is a relic of former Equestria. I consider this to be the flag of "The Greater Equestrian Empire of Harmony" the golden and enlightenment age of Equestria. Centuries to millennia's go, not only were all three pony tribes united, but the empire had citizens of all species, dragons, changelings, griffons, yaks, kirins, zebra and hippogriffs all were friends with them and worked alongside them to build a better world. And then something came along and screwed it all up. Even after Twilight passed, her Cutie Mark became the symbol of Equestria.