Towards a taxonomy of sustainable finance in Costa Rica

During the month of May, Costa Rica will submit its first taxonomy of sustainable finance to public consultation. Why did this taxonomy arise? What advantages will it bring to the Costa Rican financial sector? Will it be mandatory in Costa Rica? And first of all, what is a taxonomy?

In a broad sense, a taxonomy is an orderly, hierarchical classification. The most common is the biological taxonomy, which we use to classify living things. Thanks to it, today’s humans are designated as Homo sapiens sapiens. That title of wise men, squared, leaves us with enormous responsibilities, such as that of seeking a more sustainable life, one that respects biodiversity and combats climate change and its effects.

“Green” taxonomies and greenwashing

Sustainable finance taxonomies, sometimes referred to as “green taxonomies,” help us with that task. They provide a rating system for sustainable investments or credits, such as sustainable bonds or green credits. They are quickly becoming a must-have tool for any environmentally and socially conscious investor, as it answers a key question: will my money go to genuinely sustainable efforts, or will it simply contribute to greenwashing?

Greenwashing consists of appearing to be sustainable, when the reality is different. This is a hot topic in Europe, where a directive has recently been published  that helps decrease misleading claims by companies to investors or consumers related to sustainability. Why should the Costa Rican financial sector be interested in taxonomies?

According to RepRisk, banking and financial services are second only to the oil and gas sector in the number of greenwashing incidents globally. These incidents pose a reputational and legal risk to financial institutions. If banks and other financial institutions in Costa Rica want to attract foreign capital for sustainable investments, they must align with a sustainable finance taxonomy. The Costa Rican taxonomy is being designed to do just that.

What does the taxonomy offer the investor?

First, it standardizes the parameters of what is, or isn’t, sustainable. This creates legal certainty and avoids market fragmentation. Second, it provides transparency and confidence to the investor that their money is being used in sustainable investments. Because not all projects that appear sustainable, truly are. For example, if a hydroelectric project has caused damage to conservation areas or eviction of communities irregularly, the project does not qualify as sustainable, according to taxonomies.

In other words, in addition to contributing to the mitigation of carbon emissions into the atmosphere, the project must demonstrate that it has not caused significant harm to other environmental objectives or to people. In addition, the taxonomy requires that the company in charge of the project has good internal management and supervision practices, which guarantee adequate governance in sustainability issues.

On the other hand, taxonomies make it possible to mobilize resources towards sectors or activities that contribute to priority objectives. In Costa Rica, the priority objectives of the taxonomy are mitigation and adaptation to climate change, although work is already underway on the next taxonomy, which will include the objectives of biodiversity protection and ecosystem restoration. Other objectives that will be added with the evolution of the taxonomy are the transition to a circular economy, the sustainable use and protection of water and marine resources, and pollution prevention.

What has been involved in the development of the taxonomy?

 The development of Costa Rica’s taxonomy of sustainable finance is led by the Ministry of Environment and Energy (MINAE) and by the four superintendencies of the financial sector (SUGEF, SUGEVAL, SUPEN and SUGESE). The process began in mid-2023 with the identification of the key local actors for the collection of the technical inputs that make up an instrument of this type.

In January 2024, 12 working groups were set up with representatives of the prioritized economic sectors, including: agriculture and livestock, construction, transport, solid waste, manufacturing, and tourism, in which representatives of the public, private and academic sectors participated. Based on these working groups, an initial version of the taxonomy was defined, which has gone through several technical review processes.

The public consultation, which will take about a month, will begin in early May. The version for consultation will be published on the websites of all financial superintendencies. It will then be submitted for approval to the four superintendencies and the MINAE. Then, there will be a pilot process with a sample of banks, insurers, pension funds, and issuers. Finally, a draft regulation will be developed, which would be ready by the second half of 2025.

Will it be mandatory?

Once adopted and published, the taxonomy will serve as a voluntary guide for market players. However, it will become mandatory in a gradual process that will be defined by the superintendencies, as has happened in Europe.

In addition, the fact that there is a taxonomy for Costa Rica does not omit the fact that foreign investors prefer the application of other taxonomies, such as the European one. This means that those who have advanced in the definition of green or sustainable financial products, following other taxonomies, have advanced work that can then be refined according to the investor.

After Mexico, Colombia and Panama, Costa Rica will be the fourth Latin American country to have a green or sustainable taxonomy. It is advisable to keep an eye on the publication of this taxonomy, next May, to make contributions that strengthen this important instrument.