July 1, 2021
What are the benefits of a green finance taxonomy?
To strengthen the financial system that is facing the cascading impacts of climate change, it is vital to empower all market actors and promote the disclosure of capital flows to green sectors.
Green finance taxonomies are classification systems that identify which economic activities are considered environmentally-friendly and define clear performance thresholds for each activity to meet key sustainability objectives (ICMA, 2020). These objectives can range from biodiversity protection and pollution prevention to climate change adaptation as well as mitigation. Taxonomies thus contribute to directing capital flows towards sustainable investments and help increase the financial disclosure of public and private market actors, hence reducing information asymmetries and increasing financial transparency. In essence, green finance taxonomies help investors, companies, issuers and project promoters navigate the transition to a low-carbon, resilient and resource-efficient economy (EU TEG, 2020).
We are developing the enabling environment for a green finance taxonomy in Peru.
Primarily following the World Bank recommendations for taxonomy development (World Bank Group, 2020), our work includes:
Mapping of relevant actors from the public, private and regulatory sectors;
Systematizing all lessons learnt and identifying best practices from international taxonomy experiences (scroll down for an overview and comparison of national green finance taxonomies around the world); and
Delivering several capacity building workshops to all key actors (scroll down to re-watch the public workshops held in January 2022).
Our ultimate goal is to establish a roadmap with action points for the continuing development and maintenance of a green finance taxonomy in Peru. This work plan shall define the environmental objectives, prioritised sectors and economic activities, stages, actors and conditioning or minimal requirements that must be considered for the eligibility of green activities, projects or expenses.
This work plan will be tailored to Peru and implemented by an ad hoc inter-institutional working group in order to promote investments in biodiversity- and climate-friendly companies.
Biodiversity has a high economic value for all Latin American countries, but it more than ever faces crucial challenges for its financing.
The UNDP’s BIOFIN program has estimated that the financing gap to protect biodiversity in Peru amounts to up to USD $381 million from 2016 to 2021 (BIOFIN, 2021). The mobilisation of the financial system and the capital market is key to closing this gap and increasing investments in biodiversity-friendly projects, next to having a green finance taxonomy that facilitates a dialogue between all actors in the financial market.
Green finance taxonomies are very relevant to businesses.
Green finance taxonomies include disclosure regulations that require large financial and non-financial companies to disclose to what extent their economic activities are taxonomy-aligned. This has the following implications for companies:
Companies will provide the market with critical information on their green revenue and expenditure, hence increasing transparency regarding their environmental performance;
Companies with taxonomy-aligned activities will benefit from institutional investors, retail investors and banks interested in green investments, as they will be looking to finance taxonomy-aligned economic activities;
Companies that focus on taxonomy-aligned economic activities will have better public reputations (a valuable business asset), as well-informed citizens will scrutinise the impacts of companies on the environment and their sustainability;
Companies can identify potential hazards, measure exposure, and determine overall vulnerability by aligning their business with taxonomy regulations, hence increasing their risk management, and building resilience.
Our capacity building workshops
In close collaboration with Climate & Company, the Peruvian Ministry of Environment (MINAM) and the German Development Agency (GIZ) held two workshops in January 2022, as part of the project deliverables. The objective of these workshops was to make participants aware of the development of green finance taxonomies worldwide and the potential of this instrument to favour sustainable development, generate opportunities for green growth in the private sector, and promote greater transparency in the disclosure of information related to investments and credits in Peru.