Colombia has joined a small but growing list of emerging markets that have launched a green taxonomy, becoming the first Latin American country to do so.
The taxonomy was launched at the New York Stock Exchange yesterday by Colombian president Iván Duque, who said the pioneering document would “become a reference model for other emerging markets, hand in hand with the private sector, in Latin America”.
Its debut was lauded by BlueBay’s senior sovereign strategist Graham Stock, who said the firm had discussed similar initiatives with central banks and finance ministries in Mexico, Brazil and Chile in recent weeks.
“The launch of Colombia’s green taxonomy is a very significant development. It demonstrates a commitment to the integration of objectives such as climate change mitigation and protection of ecosystems into the decision-making of the financial sector. The Colombian authorities are setting a precedent that many others will follow,” Stock said.
Separately, Actis sustainability head Shami Nissan said the tool would help investors to identify green opportunities and drive “greater transparency and accountability, which are critical for directing more capital towards sustainable finance”.
Colombia’s taxonomy borrows heavily from the EU’s first-of-its-kind green taxonomy but has a distinctive focus on land use, in line with the significant level of domestic emissions associated with the activity. Forestry, agriculture and livestock sector activities are responsible for 59% of Colombia’s greenhouse gas emissions, government statistics show.
Soil management has also been included in the taxonomy’s seven overall environmental objectives, with the rest mirroring the EU’s taxonomy objectives of climate change mitigation and adaptation, biodiversity protection, water management, circular economy and pollution prevention.
But Colombia has not followed the EU’s controversial move to classify nuclear energy and natural gas as green activities, and therefore eligible for green financing, according to taxonomy documents on the energy sector. The country has instead set an overall lifecycle emissions threshold of 100gCO2e/kWh – as opposed to the EU’s threshold of 270gCO2e/kWh for natural gas activities that meet certain conditions – and identified conventionally green energy sources such as solar, wind and biomass.
There are also differences in how the taxonomy is structured. Unlike the current version of the EU’s green taxonomy, which is associated with the first two objectives of climate mitigation and adaptations, Colombia’s taxonomy also includes provisions for land use-related sectors that advance multiple environmental objectives.
An earlier government consultation described the sector-focused approach as responding to “the particular characteristics of economic activities linked to land use in Colombia… [which] makes it possible to advance simultaneously in several environmental objectives in a substantial way”.
The taxonomy was developed with the assistance of international partners including the IFC, the World Bank, and the Climate Bonds Initiative, and received financing from Swedish development agency SIDA and UK climate finance fund UK PACT.
The UK has steadily increased its funding for sustainable finance initiatives in developing countries through UK PACT – which has eight country programmes ongoing – and its cross-government Prosperity Fund, which was recently wound down.
The use of a taxonomy to define environmentally sustainable activities is increasingly being embraced across emerging markets. National classifications are already in place in China, Malaysia and South Africa, and in the later stages of development in Singapore, Thailand, the Philippines, Bangladesh and Vietnam, as well as at regional level for ASEAN countries.
Developed countries are also taking up taxonomies, with similar initiatives planned in Australia, New Zealand, the UK and Canada.
It comes as emerging markets attempt to make up for a historical shortfall in climate funding that developed countries have repeatedly failed to deliver, despite pledging some $100 billion in annual financing commitments since 2009. Developing countries have also faced longstanding hurdles to secure private investor capital to fund their energy transition. Fund data shows that emerging market strategies received less than 5 percent ($4.8 billion) of global inflows into ESG-labelled funds in Q3 2021.