By: Staff Writer
July 14, 2023
A United Nations Environmental Programme (UNEP) report said that proper classifications for climate assets and activities are vital in delivering on key climate change objectives in Latin America and Caribbean (LAC).
The “Common Framework for Sustainable Finance Taxonomies for Latin America and the Caribbean,” report said that “financing flows to address climate change have been scarce in the LAC region (6 percent of the global distribution) and that it has not been equitable in all countries, it is important to foster the creation of mechanisms that promote a reliable market that allows capital flows to move towards sustainable investments, increasing climate finance across the region. Taxonomies can help establish clear, science-based definitions and remove barriers for such capital flows.
José Manuel Salazar-Xirinachs, executive secretary of the United Nations Economic Commission for Latin America and the Caribbean (ELCAC), said: “The countries of Latin America and the Caribbean face enormous economic, social, and environmental challenges, which require investing much more than the current 19% of the region’s GDP. But not only the volume of investment is relevant, but also its destination, which must be transformative of the productive sector, making it more efficient, sustainable, and competitive in the markets of an increasingly present future.
“For this, the transition of the financial system towards sustainability is key and the taxonomy is the foundational instrument for this transition. This proposal for a Common Framework aims to be a technical contribution to the dialogue between the authorities responsible for coordinating the growing number of taxonomy initiatives in the region. A dialogue that is convenient to harmonize, as far as possible, the methodologies of these taxonomies, with which potential investors can reduce their transaction costs, making capital markets in Latin America and the Caribbean more attractive. This document is a contribution of international organizations operating in the region, a team effort of which ECLAC is very satisfied, hoping that it will be useful to financial regulators in the region.”
The report added: “Taxonomy, in the context of sustainable finance, is a classification system identifying activities, assets, and/or project categories that deliver on key climate, green, social, or sustainable objectives with reference to identified thresholds and/or targets.”
Ensuring that these classifications are created would mean clearer space to providing the proper policy response to critical nuance initiatives as well as providing better avenues for gender specific climate change initiatives that deal with certain dynamics on the margins.
The report also said: “Taxonomies are science-based documents that provide clear guidance to all the market participants to identify projects, assets and activities that are low-carbon or compatible with low-carbon economic development and/or environmentally sustainable and help avoid greenwashing. A taxonomy seeks to strike a balance between standardisation (international environmental sustainability standards, this includes ESG criteria) but also incorporates local context and developments. Taxonomies can also serve as a tool for transition and help direct investments, especially for the transition of high emission and hard-to-abate sectors (e.g., cement and steel manufacturing).
“Having clear science-based definitions that are comparable with other taxonomies will help increase preferential capital flows towards sustainable investments. Taxonomies can help align investments with the countries’ environmental priorities and sustainable development plans and also to redirect earmarked budget from the public sector towards more sustainable activities that would otherwise not have been implemented.
“They can also serve as guiding documents for disclosure and labelling of financial products. Taxonomies can be used by market participants for asset, portfolio, and entity-level alignment approaches (e.g., transition plans), among others.”
The LAC, increasingly becoming more homogenized, is in need of being on the same page on climate change classification standards because it will have the ability to unlock financing on a broad scale that can help the region as a whole rather than climate change issues being thought to be in small silos, akin to particular countries.
“A common framework for LAC will help ensure regional and global harmonisation while allowing for local contextualisation. It also aims to provide guidance on objectives, sectors, activities, metrics, and methodologies developing screening criteria for key sectors.”