Colombia’s Green Taxonomy: a First in Latin America

As financial markets are intertwined, it was expected that adopting the EU Taxonomy in 2020 would have a global impact. We now see countries from all over the world adopting similar regulations to encourage sustainable finance. In Latin America, Colombia is the pioneer. Let’s discover together Colombia’s Green Taxonomy.

Colombia Launched its Own Green Taxonomy
Colombia's Green Taxonomy as Navigation Tool towards Sustainability
What are the Goals of Colombia’s Green Taxonomy?
Sectors Contributing to Climate Mitigation
Emphasis on Specific Sectors
The LATAM Taxonomy
Greenomy: your Sustainable Finance Reporting Solution

Colombia Launched its Own Green Taxonomy

On the 11th of April 2022, Colombia launched its own Green Taxonomy. According to Jorge Castaño Gutiérrez, Colombia's financial superintendent, the Colombian Green Taxonomy is the instrument through which the rules of the game are given order so that issuers and investors develop a solid, transparent, and integral green market. This allows financial market participants to play a clear role in adequately facing one of the most important challenges of this decade: climate change.

The Colombian Taxonomy is an inter-institutional effort led by the Ministry of Finance, Public Credit, and Financial Superintendency entities, together with the Ministry of Environment and Sustainable Development, the National Planning Department, and the Administrative Department of Statistics. It also had the technical and financial support of the World Bank Group.

Colombia's Green Taxonomy as Navigation Tool towards Sustainability

The objective of Colombia's Green Taxonomy is to provide clarity for those who invest in green projects and initiatives, by enabling them to understand whether an investment is classified as green within Colombia. Based on this new classification standard, the first version of the Colombian Taxonomy will bring resources to projects, activities, initiatives, and assets that contribute to meeting environmental objectives. The Taxonomy will join other initiatives, such as green bonds, a market that is of great importance, and strategies for financial protection against the risk of economic and environmental disasters.

Therefore, Colombia's Green Taxonomy is a useful tool that will function as a navigation chart for companies, issuers of securities, local and foreign investors, financial regulators, public and private entities, and financial consumers.

The Green Taxonomy will allow the leading players in the Colombian capital market to easily identify which activities substantially contribute to the fulfilment of environmental goals, facilitate the differentiation and classification of financial instruments designated as green, increase transparency, and support the monitoring of investments and green public spending.

What are the Goals of Colombia’s Green Taxonomy?

The Taxonomy has 4 core goals that relate to the climate risks in the Colombian region, namely:

To support companies, investors, financial institutions, public, and private entities among others, to identify and evaluate the economic activities and activities that make a substantial contribution to the environmental objectives.
To strengthen the differentiation and classification of eligible financial instruments, in order to facilitate the redirection of capital towards green sectors.
To harmonise the criteria and definitions in green/sustainable finance, through a common language to avoid greenwashing.
To support the development, monitoring, and follow-up of green markets that have sustainable objectives, as well as to identify the activities with potential or breaking points of the resources.

The activities that are eligible under the Taxonomy are selected through 2 filters:

The relevance to the Colombian context; and
The contribution to the environmental objectives.

In total, the Colombian Taxonomy identified 47 economic activities that could contribute towards achieving the environmental objectives and, therefore, the Colombian green transition.

Sectors Contributing to Climate Mitigation

In this context, Chapter 2 of the Taxonomy presents eight sectors, assets, and economic activities that can contribute to the environmental objective of climate change mitigation:

Energy
Construction
Waste management
Emissions capture
Water supply and treatment
Transportation
Information and communication technologies
Manufacturing

Furthermore, Chapter 3 presents three sectors concerning land use:

Livestock
Agriculture
Forestry

For these activities, five environmental objectives were taken into account:

Climate change mitigation
Climate change adaptation
Soil Management
Water management
Conservation of ecosystems and biodiversity

Emphasis on Specific Sectors

Most notably, Colombia's Green Taxonomy will be the first Green Taxonomy with an emphasis on land use, specifically on the management of soil and land by the forestry, agriculture, and livestock sectors, given that these sectors together are responsible for 59% of greenhouse gas emissions in Colombia.

Energy Sector

One sector that is critical to the success of Colombia's Green Taxonomy, is the energy sector, representing 12% of Colombia’s GDP.

In this sector, Colombia has set a strong energy threshold, establishing the country as a leader in the net-zero race. It has not classified nuclear energy and natural gas as sustainable economic activities and has set an overall lifecycle emissions threshold of 100gCO2e/kWh. For context, this is almost three times lower than that of the EU, which is set at 270gCO2e/kWh.

However, this percentage will decrease due to declining reserves and thus lead to political and economic pressures to identify alternative resources of income, in order to maintain investment and social services for a large, disadvantaged population.

The LATAM Taxonomy

Following Colombia's pioneering role in establishing the first Green Taxonomy in Latin America, the Colombian Financial Regulator Superintendencia Financiera de Colombia (SFC) has decided to leverage its role even further by announcing plans to support the construction of a Sustainable Finance Taxonomy for Central America. The regulator's new sustainable finance roadmap outlines its plans to contribute to the drafting of a Green Taxonomy under the structure of a cooperation agreement signed in August 2021 between the Central American Council of Banking Supervisors and Other Institutions (CCSBSO), the IFC, Norfund, and FMO.

Greenomy: your Sustainable Finance Reporting Solution

Greenomy offers advisory services to governments by leveraging our experience with the EU Taxonomy and helping to codify national taxonomies. As the implementation of the Colombian Taxonomy moves forward, Greenomy can play an important role in Colombia and in LATAM, utilising its SaaS platform and advisory experience.

In Colombia, Greenomy is working with various stakeholders in the government and the private sector to assist in the alignment of their objectives with the Colombian Taxonomy. For more information about our Global Outreach services, reach out to our LATAM representative at: alfred@greenomy.io or book your demo here to trial our solution today.