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A new Taxonomy is born: insights on the Mexican Sustainable Taxonomy
Since the publication of our study the “New Geography of Taxonomies”, in July 2021, jurisdictions in Europe, Asia and the Americas have either begun or concluded their taxonomy development process. In Latin America, Mexico recently published its Sustainable Taxonomy. The expansion of taxonomies across the world, particularly in emerging markets, is not unexpected. They continue to be perceived as a cornerstone to the development of sustainable finance markets by providing clarity and standardization to market participants. The uses of taxonomies are not limited to the issuance of green bonds, with potential implications for capital requirements, regulatory supervision, collaterals and disclosures.
Overview of existing and under development sustainable finance classifications of activities
Source: Natixis GSH
The development of Mexico’s Sustainable Taxonomy
In March 2023, Mexico’s Ministry of Finance, through the Secretary of Finance and Public Credit (SHCP in Spanish) launched the country’s Sustainable Taxonomy with the initial aim of addressing three major sustainability challenges i) climate change, ii) gender equality and iii) access to basic services in municipalities. Its purpose is to facilitate financial flows and mobilize capital for sustainable activities, generate reliable information, provide transparency, create the foundation for sustainable finance policies in Mexico, and address social gaps and vulnerabilities. The taxonomy comes after two years of intense work by the Mexican government and technical experts from the public and private sectors, financial institutions, academia, civil society and international organizations.
In Natixis’ assessment of taxonomies, we identify five core criteria for taxonomy legitimacy and acceptance: comprehensiveness (sectoral span, amount of GHG emissions covered, number of activities reviewed, level of granularity and categories/subcategories), sophistication (refined criteria, intermediate levels, cumulative set of conditions, ESG safeguards), usability (nature and complexity of demonstration and verification process, data inputs required), stringency (level of ambition of criteria) and inclusiveness (dialogue and consultation with recipients and users).
Table 1. Insights from Mexico’s Sustainable Taxonomy
Comprehensiveness. Mexico’s Taxonomy addresses six environmental objectives – climate mitigation, climate adaptation, water and marine resources management, conservation of ecosystems and biodiversity, promotion of a circular economy, and pollution prevention and control – and five social objectives – gender equality, access to basic services (municipalities), health, education and social inclusion. It also covers six economic sectors that are aligned with more than 94% of the Mexican NDC mitigation goal for 2030 (agriculture and forestry, electricity networks and water supply, construction, manufacturing, transport, waste management and remediation services, plus gender equality (a transversal thematic to 20 sectors of the economy).
Sophistication. The Taxonomy’s technical screening criteria are divided into four elements, i) main parameter, which is the element or thematic criterion in which the sustainability of an economic activity is evaluated; ii) significant contribution, which is the environmental or social performance of an economic activity that can be measured through established metrics and thresholds, iii) Do No Significant Harm, which is the set of environmental criteria that allows the evaluation of an economic activity to ensure it does not have a negative impact on any of the other objectives of the Taxonomy, and iv) minimum safeguards, which address human rights and good international practices on labor and governance, as defined by Mexican laws and regulation and international conventions. These guiding elements are the basis for 124 activities within the six economic sectors mapped above. In addition, a points-based gender equality index with three pillars – decent work (66 points), wellbeing (54 points) and social inclusion (54 points) – was developed and establishing a minimum score of 72 points to be considered eligible.
Usability. While the Mexican Taxonomy technical screening criteria are sophisticated, it does use a regional classification, the NACIS – North American Industry Classification System to map eligible economic activities. It also provides granular information on the type of products that are eligible with in each activity, as well as what is excluded from each of these activities. For Agriculture and Forestry, it goes further and includes the type of documentary evidence that should be presented to demonstrate eligibility. The Taxonomy is also clear on how to identify if an activity is or is not Taxonomy aligned: activities must be included in the Taxonomy, activities should be aligned to metrics and thresholds set in the technical screening criteria, comply with the Do No Significant Harm (DNSH) component and adhere to the Minimum Safeguards. The Taxonomy indicates that further engagement with targeted users of the tool will be required for optimal implementation. It will also be important to ensure the data gap is narrowed, with issuers being adequately equipped for screening and reporting against the Taxonomy.
Stringency. The technical screening criteria for climate change mitigation considers the amount of CO2e emissions, % of CO2e reduction and CO2e savings, with specific thresholds for each activity. For adaptation activities, metrics consider adaptive or adapting activities, with thresholds considering the reduction of climate risk, and enabling activities for adaptation of economic activities. For gender, an index with a minimum score has been set to measure the impact of eligible activities. Thresholds and metrics are aligned to international benchmarks, such as the 100gCO2e/kWh threshold for energy activities. In addition, all activities should comply with the DNSH and Minimum Safeguards Criteria.
Inclusiveness. Through its development process, discussions involved the objectives and sectors to be included, reporting guidelines, regulatory design, comparability with other taxonomies (notably the EU Taxonomy, but also with references to Colombia, China and the Climate Bonds Taxonomies), operation, training needs and implementation costs. A first consultation round on these elements was carried out through a survey directed towards financial authorities, trade associations and other relevant stakeholders. A second consultation round, to communicate the progress of the Taxonomy, was carried out through a series of dialogues with participants from the Mexican financial system (e.g. trade associations, stock exchange, issuers). Further engagement with users of the Taxonomy will be required to ensure its usability, which will be an on-going process over the coming year.
Overview of Taxonomy Objectives and Economic Activities
Source: Mexican Sustainable Taxonomy, First Edition, 2023.
The Mexican Taxonomy covers both environmental and social activities. It took an innovative approach by selecting one social category that is highly material to the country. While other Taxonomies, such as Georgia’s and Kazakhstan’s have highlighted their intention of addressing social issues, the Mexican Taxonomy has been the first to do so. The Taxonomy is divided into three sections, the first covering climate change mitigation, including the six economic activities in the table above; the second, covering climate change adaptation and the third, covering gender equality. Each of these include DNSH and Minimum Safeguards. Alignment with the eligible categories, as well as demonstrating compliance with DNSH and the Minimum Safeguards is expected to be covered through the provision of Second-Party Opinions (SPOs), in line with international best practices.
1. Climate Change Mitigation: 124 activities across agriculture and forestry, energy, manufacturing, transport, construction and waste management. Technical screening criteria are sector-specific and include NACIS Code classifications, description of activities, including eligible activities, excluded activities and eligible products. It also includes the description of substantial contribution to climate change (gCO2e) and minimum requirements for activities to be considered sustainable, as well as DNSH and Minimum Safeguards.
2. Climate Change Adaptation: activities are divided into two, adapted activities or enabling activities, which should substantially contribute to adaptation. Criteria for adaptation related activities focus on reducing physical risks, supporting system adaptation and monitoring results; while criteria for enabling activities reflect the support provided to other economic activities. The description on climate risks is included within the section, as well as a forecast for Mexico. There are specific adaptation measures described for agriculture and livestock. As for mitigation, adaptation activities are required to comply with DNSH and Minimum Safeguard Criteria.
3. Gender Equality: is divided into three pillars - decent work, wellbeing and social inclusion – that are broken down into 43 questions, with a total of 174 points. Criteria for decent work, includes equal pay, equal access and labor development, care and co-responsibility (66 points), criteria for well-being includes the promotion of equal access to good and services, health with gender quality perspective, economic and social empowerment (54 points) and social inclusion is a criterion on its own (54 points). To be eligible, activities should reach a minimum of 72 points.
4. Do No Significant Harm (DNSH): required for all Taxonomy activities (sector-specific). To be deemed sustainable, mitigation, adaptation and gender equality activities must comply with DNSH criteria (water, climate change mitigation, biodiversity, pollution prevention and control, and circular economy).
5. Minimum Safeguards: required to comply with Mexican laws and regulations, international principles, including the OECD Guidelines for multinational companies, the UN Guiding Principles for Business and Human Rights and ILO’s Declaration on Fundamental Principles and Rights at Work.
Leveraging the EU Taxonomy for Sustainable Activities
To build its Taxonomy and make it interoperable (align concepts, methodologies, metrics and thresholds) with those in other jurisdictions, Mexico looked at the EU Taxonomy, China’s SDG Taxonomy, Colombia’s Green Taxonomy and the Climate Bonds Initiative Taxonomy. It chose to more significantly leverage the EU Taxonomy, which can be observed in the choice of the Environmental Objectives (conceptual alignment) as well as through the definition of the DNSH elements.
Source: Mexican Sustainable Taxonomy, First Edition, 2023.
The selected methodology for defining eligible activities, is also similar to the EU’s (methodologies). The Mexican Taxonomy does differ as it does not include all ten activities under the EU Climate Delegated Act and has incorporated Agriculture and Livestock; a trend across Latin America as can also be observed in the Colombian Taxonomy. Additionally, the Mexican Taxonomy refers to activities that substantially contribute to climate change mitigation and adaptation, as well as the incorporation of DNSH and Minimum Safeguards; the latter leveraging Mexican Law and Regulations as well as international best practices. The Mexican Taxonomy also has adopted similar metrics for measuring the output of individual activities, which ensures data comparability, and within adaptation it has focussed on activities that substantially reduce material physical risks. Other harmonization examples include, but are not limited to:
- Reporting and screening mitigation activities against gCO2e, which allows for general comparability across multiple Taxonomies and methodologies;
- On forestry activities, both the EU and Mexican Taxonomies include a coverage period of 10 years.
- The GHG emissions threshold for hydropower generation being lower than 100gCO2 e/kWh and power density equal to or greater than 5W/m2, is also compatible with other Taxonomies.
Conclusion
It is still early days for the Mexican Taxonomy which is only beginning to be thoroughly understood by the different sectors across the economy. The next steps are to build capacity among Mexican stakeholders on its use and practical applicability. The primary users of the taxonomies will undoubtedly be corporates, as well as credit and financial institutions, institutional investors and government agencies. The Taxonomy has therefore not only been designed to encourage thematic bonds or loans, but to act as a catalyst for the Mexican Sustainable Finance market, mobilizing investment flows consistently.
For now, the Mexican Taxonomy is voluntary. However, there is an indication that the government will assess the regulatory landscape and market requirements following this initial phase. While the voluntary nature is welcome in order to allow stakeholders to gradually adopt and align their sustainable finance programs and activities to the Taxonomy, concerns over the effectiveness towards leveraging more investments in the absence of regulation exist. Nevertheless, most existing Taxonomies to date are voluntary and have proven to be an effective tool to guide the market accordingly.
The Mexican Taxonomy is the second to be launched in the Latin American region, after Colombia, and considering its design it should be an important benchmark for other jurisdictions in the region, particularly regarding the inclusion of social objectives.
