This article is part of a series on the creation of sustainable finance taxonomies around the world. You can read more in this series by clicking here.
Mexico’s central bank, Banco de México, joined the G20’s Green Finance Study Group (now the Sustainable Finance Study Group) back in 2016, and was a founding member of the Network of Central Banks and Supervisors for Greening the Financial System a year later.
At around the same time, Mexico’s national banking association ABM realised that, in order to attract the growing pool of green capital from development banks, the Green Climate Fund and institutional investors in North America and Europe, it would have to develop a label for eligible financial products.
“In an emerging market like Mexico, where the capital markets aren’t so mature, it’s the banks that play a key role in market developments,” explains Santiago Lorenzo, Head of Sustainable Finance at Climate Action Network International and one of the experts tasked with developing thinking on the topic by ABM’s 40-strong Sustainable Finance Committee. Of those 40, five commercial members and three development banks helped pilot a basic version of the taxonomy earlier this year and, by the end of 2020, proposals will be published on how financial regulators can create a national framework.
Mexico’s influential Council for Financial Stability, launched its own Sustainable FInance Committee earlier this year, with the heads of all the key private sector associations, covering banking, insurance, pensions and investment. It will take forward the plans, based on ABM’s recommendations and another existing framework from Mexico’s Secretariat of Finance and Public Credit and national development bank Banobras.
The latter, the Mexico Projects Hub for Investment and Infrastructure, provides investors with the details of hundreds of new and operational projects in the country, as well as investment vehicles. It isn’t a sustainability platform but it does contain dedicated sustainability datasheets for projects.
Those datasheets have been developed in partnership with the Inter-American Development Bank, and rank projects according to how much sustainability information has been publicly disclosed. It doesn’t make any assessment of the credibility of that data, or the sustainability performance of a project, but the goal is to encourage companies to report more on social, environmental and climate-related risks and impacts, and to help investors see which projects have considered such. Projects can be compared with peers on the platform.
The sustainability assessments are far from finished, with plans to roll out the sustainability data sheets across all projects over time.
Meanwhile, ABM’s work on taxonomy is focused on economic activities rather than projects. Its pilot covered six sectors: energy, water, buildings, transport, waste management and agriculture. Within those sectors, 11 economic activities were chosen.
Lorenzo described the EU taxonomy as the “benchmark”, but is quick to add: “The interest isn’t in being aligned with Europe – we are interested in responding to the expectations of investors looking for green assets, and most of those are on the west coast of the US and in Europe.”
To discourage greenwashing, he says the Mexican taxonomy should include guidelines around company strategy, as well as business activities.
“There are some banks that would label something green without questioning it too much, because their interests are commercial. We are proposing that we develop guidance on how instruments must fit within broader corporate strategies, to make sure they are not just about getting money for a small number of company activities that just happen to be green.”
The taxonomy could have other uses, he adds, pointing to Mexico’s work within the NGFS on creating climate stress tests. “The private sector here is aware that is happening, and they realise that at some point the taxonomy and the stress tests might become law, so the banking system in particular wants to be prepared for those regulators developments.”
So what could a Mexican green taxonomy look like?
Well, if the current proposals are anything to go by, it won’t always prioritise climate change. While the EU and Canada have so far emphasised mitigation in their frameworks, Mexico – like China – has other environmental priorities.
“We aren’t in the top 10 greenhouse gas emitters in the world,” points out Lorenzo. “But when it comes to biodiversity, we have a major role to play in conserving the world’s species, and we are losing a lot of important ecosystems because of land use change.”
As a result, the proposals are likely to include a recommendation that, while some business activities will be vital to bringing down carbon emissions, others – “like agriculture or some infrastructure” – could use a different key indicator linked to biodiversity (water is another priority).
“We’re also looking at the possibility of creating a ‘double threshold’,” Lorenzo continues. “As an emerging economy, we have two very different types of corporation: we have the global, cutting edge companies, and we have very local enterprises.” The former, he says, should be obliged to meet higher standards under the taxonomy – comparable to the EU’s rules – while the latter could be eligible if they invest in meeting legitimate environmental objectives.
“This is not about making every single investment green,” he insists, acknowledging that most business-as-usual updates to equipment and hardware will automatically be greener and more efficient, so companies “have to be investing not in order to make money or keep up, but to contribute to environmental goals”.
Other recommendations expected in the final report include using a standardised template for disclosure on green finance, and setting up a ‘green integrity group’ to deal with data.
“We know that one of the biggest problems we face in all of this is that environmental data is not collected in a way that is useful in financial markets. Financial institutions need information packaged in a particular way, but if you leave it completely to them, there could be issues around credibility. So, we suggest a group of advisors to make sure the taxonomy is scientifically sound, and to bring experts together from finance and nature to work on generating adequate data.”
That group would be in addition to sector experts, which are currently being selected, with a view to developing the thresholds and metrics for “a good number” of economic activities by COP26 in November 2021.