Exploring Latin America's shift towards green finance

Green finance is growing as a response to the climate change crisis, and investors are increasingly relying on ESG criteria to finance projects.

The taxonomy system for classifying activities that contribute to mitigating the impacts of climate change is an important tool for both the financier and the owner of the project.

Colombia’s President Iván Duque launched his country’s green taxonomy reporting system in New York in April, hoping to garner interest for environmentally friendly projects.

Marcela Ponce, an expert in green finance operations who leads the Climate Financing Program of the IFC in Latin America and the Caribbean, breaks down the opportunities available with green financing.

BNamericas: Following the Colombian government's launch of the green taxonomy system last month, what prospects do you see for financing and for which sectors do you see better prospects?

Ponce: The real importance of the launch that was made in New York is that the government has accepted the taxonomy as its definition of green assets for the country, and that is very much in line with the country's ambition to have a transversal green agenda. 

In Colombia there is not only adherence to all the issues of the Paris Agreement, but there is also the net zero plan.

The launch is a very clear message both for the financial sector and for the real economy and for the public and private sectors, because the fact that the ministry of finance has been part of the launch of the taxonomy means that there is also interest in recognizing that the government is implementing standards that are in line with international ones.

Colombia's taxonomy is quite aligned with the taxonomy of the European Union, precisely with the aim of facilitating international investment.

The Colombian government recently launched a sovereign green bond and now with the taxonomy the message is even clearer, the search is on for international investors interested in this type of instrument, both sovereign and from the private sector.

BNamericas: Do you have an estimate of how much is the financing portfolio for green projects or climate-related projects in Colombia?

Ponce: According to the Asobancaria [Colombia’s banking association] sustainability report, as of December 2020, the balance of the green portfolio reached a total of 11.03tn pesos [US$2.73bn], of which 5.1tn pesos correspond to placements in 2020.

Within the lines of investment defined, the most prominent is sustainable construction, followed by energy efficiency and renewable energies.

Additionally, the category ‘other’, which includes different lines such as construction of civil works for drainage and irrigation; green guarantees, loans and mortgages; and use and management of waste and residual water, among others, is in first place, reaching an amount equivalent to 48% of the total green portfolio.

BNamericas: How can you reconcile the environmental objectives of climate change mitigation and zero emissions with profitability for investments?

Ponce: They go hand in hand. To the extent that projects and companies implement practices of sustainability, energy efficiency, renewable energy, clean transportation, there is an almost immediate result. The first thing you empathize with are your interest groups because the world, the ordinary citizen, investors, banks, companies are asking us to be respectful of the environment.

Recently there was a survey launched by IBM that says that there are more opportunities for young people who want to work for a company that has sustainability criteria than for one that does not.

So interest groups are demanding this. The first thing is you implement and empathize, you are sustainable and you empathize with your stakeholders, your customers, your employees, your investors, your own board of directors, etc. The second thing is you have a positive impact on the environment. In addition, one of the great things that sustainability brings is that the same measures allow you to be more efficient, consume less energy, reduce your operating costs, so it’s a win-win.

We understand that at the moment there is a knowledge barrier. As we clear up the doubts, it begins to be more normal to make this type of investment.

BNamericas: Colombia is a regional pioneer in green taxonomy. Do you think that Latin America is prepared to follow that example? Which countries would be more prepared?

Ponce: The taxonomy is not only dynamic, but it has to be complemented over time and updated.

We’re working at IFC and at the World Bank Group also in other countries on the definition of this taxonomy. We’re working in the Dominican Republic with the securities regulator. We’re working in Mexico on a sustainable taxonomy with the ministry of finance. We’re working in Central America with the Central American council of banking supervisors and other institutions and we’re going to start working very soon with Peru on the green taxonomy, with the ministry of the environment and with the sustainable finance unit of Peru. In addition, we’re exploring jointly between the IFC and the World Bank and other countries where we would also like to continue advancing.

We’re already working in a total of nine countries. At the end of last year, the working group on taxonomies in sustainable finance in Latin America and the Caribbean was created.

We hope that with this United Nations initiative we can contribute to having a consistent, transparent framework on the subject of sustainable finance and that it facilitates more informed investment decisions, that capital be mobilized towards the objectives of the Paris Agreement, that is, mitigation of climate change.

BNamericas: In Latin America, is there a sufficient supply of green projects?

Ponce: Not enough, that’s for sure. I believe that we have to continue reinforcing the supply of green projects to be financed in all sectors.

More than 40% of the use of green bond resources in Latin America was in energy, followed by transportation and then construction. It’s necessary to strengthen the offer in waste management projects, water, in addition to energy, construction, transportation, land use and agriculture. Sustainability practices must continue to be strengthened in all sectors so that the offer is wide and diverse.

BNamericas: In which areas are the projects that could benefit in the short term from the green taxonomy in Colombia and other Latin American countries?

Ponce: The sectors that we have addressed from Colombia are energy, manufacturing, transportation, construction, water, waste management, information and communication technologies, and land use.

Additionally, in land use, environmental objectives have been seen that have to do with water use, land use, circular economy, biodiversity, etc.

Taxonomy is not written in stone, it’s a document that’s expected to be dynamic over time.

I believe that all the countries in Latin America are now ready to move towards very clear actions of sustainable finance.

We have seen important advances, for example in Brazil, which has had a list of environmentally positive economic activities for several years, in Chile, which has been working on its road map, and there is interest from Argentina.

BNamericas: Can green taxonomy help prevent so-called greenwashing?

Ponce: Yes, without a doubt. The topic of greenwashing occurs on many occasions due to not having clear definitions.

I think that having clear definitions of what is green and what is not green mitigates the risk.

BNamericas: How can the different criteria established in the green taxonomy contribute in Latin America to the achievement of climate goals?

Ponce: In the case of Colombia, for seven sectors, the focus is climate change mitigation, with which one would hope that to the extent that these concepts are clear, they will contribute to a greater mobilization of capital towards this type of project and consequently have a reduction in carbon emissions.

To the extent that we’re replicating this in the region, the objective of the countries is the same: to reduce carbon emissions.

Accounting for these reductions is a different step. We have projects such as the Green Banking Academy, a knowledge and advisory initiative to support financial institutions in their transformation towards greener business models. What we do is train, advise, guide, deliver knowledge, lessons learned and success stories for the financial sector so that it not only finances but internally understands where it wants to be strategically, what is the appetite for green issues, how to monitor the portfolio, how it manages climate risks, and get a little ahead of the regulation that will surely also come, both for the mobilization of capital and for the management of climate risks.

We also have the Climate Assessment for Financial Institutions, a tool that financial institutions can use to input basic transaction data to see how much carbon emissions are being reduced.

BNamericas: Where is investor demand for sustainable projects heading in the world at the moment?

Ponce: This is no longer a European trend. At a global level, the expectations of international investors are that we have more and more green or sustainable instruments, which means that we have to be ready to offer more.

In Latin America, the sustainable finance market has been growing and strengthening, a reflection of this is seen in the market for green bonds or sustainable bonds, which continues to grow even despite the effects of COVID-19.

It’s true that much remains to be done, especially in the financial sector in Latin America and in emerging markets in general, and that’s why it’s so important for the IFC to provide support to banks and financial institutions, with advice and knowledge to help them so sustainable finance issues continue to grow and become stronger.

BNamericas: What is the role of banking as a climate finance provider?

Ponce: It has a very important role, at least 70% of climate finance flows have to go through banks, and the banks themselves have significant pressure from investors, their stakeholders and even their employees and customers, who demand green products. Banks have a great responsibility to adopt a clear strategy on how to support this demand at a global level.

To mitigate climate change, the gap is still very large, we have needs in trillions of dollars and we have financed a few billion dollars. So there is a very important role in the issue of financing to continue promoting more green projects, but a greater supply of projects to be financed is also needed.