Sustainable taxonomy of Mexico

The reason why major financial markets are seeking to mobilize capital towards sustainable investments is primarily driven by investors' need to know whether companies have considered sustainability risks as well as business continuity in the face of challenges as complex as water shortages for an agricultural company, environmental fines for a construction company, or even the ability to remain part of an international company's supply chain.

As risks related to ESG criteria have materialized, the need for diagnostics, frameworks, measurements, best practices, and even, in some countries, regulations have become increasingly evident.

The taxonomy is based on others already issued in the world, such as that of the European Union, China or Colombia, it also takes reference frameworks such as the Paris Agreement, the SDGs of the 2030 Agenda and the NDC (Nationally Determined Contribution).

What makes Mexico's Sustainable Taxonomy innovative is the inclusion of social goals, important to participate in the reduction of social gaps and vulnerabilities for the so-called developing and emerging economies, which have a very relevant impact on the economic evolution of a country.

It is important to mention that the sustainable taxonomy is not an obligation yet, it is voluntary, and this allows the main users of this information to educate themselves and adapt their practices and products to a new type of economy that considers environmental and social implications.

Environmental and social objectives of Mexico's sustainable taxonomy

Mexico's sustainable taxonomy proposes the following objectives, derived from the observance of other taxonomies, reference frameworks and the reality of our country:

How is it determined whether an activity can be tagged as sustainable?

Six sectors with the greatest impact were chosen based on the North American Industrial Classification System, evaluating the importance of these sectors for Mexico's development and with respect to financing flows, while it was determined that environmental issues and sustainable cities are those with the greatest number of linkages to economic sectors.

These six sectors would contribute to 94% of the mitigation goal of GHG and C (Greenhouse Gases and Compounds) set in the Mexico’s NDC:

1. Agriculture, breeding and exploitation of animals, and forest usage.
2. Generation, transmission, distribution, and commercialization of electrical energy and water supply.
3. Construction.
4. Manufacturing industries.
5. Transportation.
6. Waste management and remediation services.

In the case of the contribution to gender equality, it was determined that the 20 sectors of the Mexican economy have a scope and opportunities in this objective.

How is the degree of sustainability of these activities measured?

Sustainable taxonomy contemplates Technical Evaluation Criteria (TEC) with a solid and scientific basis, in addition to incorporate known best practices.

TECs are made up of:

• Main parameter: thematic element from which the sustainability of an economic activity is assessed. Measurable, comparable, and preferably quantifiable.
• Substantial contribution – metrics and thresholds: condition by which the environmental or social performance of the economic activity is evidenced. Metrics are the unit of measure; thresholds are the ranges of quantitative or qualitative data given in relation to the metric to determine the degree of sustainability of economic activity.
• Non-significant damage: environmental criteria that make it possible to ensure that an economic activity, with a substantial contribution, does not have negative effects on any of the other goals of taxonomy, other than the main parameter. In this way, it is ensured that progress on some objectives is not made at the expense of other environmental objectives based on regulatory legislation or standards.
• Minimum safeguards: seek to cover issues related to human rights, as well as good international practices in labor and governance matters. In this way, they define the minimum elements required for the development of an economic activity aligned with the taxonomy. These elements are mandatory and are defined by laws and regulations in force in Mexico, as well as international conventions and guidelines.

As we mentioned earlier, there are three priority objectives for the first stage of Mexico’s sustainable taxonomy: climate change, gender equality, and sustainable cities.

Below you will find the methodological framework of these objectives, which gives greater clarity of how the technical evaluation criteria are applied when evaluating sustainability: 

Source: Prepared by the author based on Mexico’s sustainable taxonomy

Each sector and economic activity described in the taxonomy has a detailed explanation in these three objectives and each element described above to know if it can be tagged as sustainable.

Who are the taxonomy users?

We have three main groups of users:

Source: Prepared by the author based on Mexico’s sustainable taxonomy.

How is this information disclosed?

Many companies are concerned about knowing how to disclose information on sustainability; however, it is much more important to be aligned, in the first place, with the sustainability criteria of the chosen reference framework. The same is true for sustainable taxonomy. Once the Technical Evaluation Criteria are met, their reporting may be considered, and the latter should include:

1. Eligibility of the activities included in taxonomy,
2. Alignment of the eligible activities under metrics and thresholds,
3. Compliance with the Non-Significant Damage criteria, and
4. Compliance with the Minimum Safeguards

Once these criteria are met, then the percentage that these activities represent in sales, capital and operating expenses may be disclosed. This evaluation will in turn be connected to the possibility of financial actors to report on which portfolio assets are aligned with taxonomy.

Some final considerations

Taxonomy is a great step for Mexico because it means giving shape and specific measurement, based on a built methodology, to sustainability. Although it is not mandatory, it does constitute, at first, a good guide for self-reflection in the selected sectors, as well as a competitive advantage for companies that commit themselves beyond the bare minimum. It is a smart business decision and not just a matter of “good will”.

Also, it is worth mentioning that if your company is not in the abovementioned sectors, that does not mean that sustainability does not impact you. Taxonomy may also bring other companies closer to understanding the relevance of the issue, but also to consider certain environmental, social, and governance objectives that constitute or strengthen their sustainability strategy.

Mexico’s sustainable taxonomy is just one more indicator of the great movement in terms of sustainability and the associated regulation that is taking place worldwide. Rather than seeing it as a cost, it is an opportunity to protect your business from real-life risks, to access sustainable financing, to be preferred by increasingly informed consumers, and in general, to safeguard your company´s livelihood for the future. Sustainability is not a trend, it is the new business model.

No matter where you are on your sustainability journey, Mazars can help. Contact us.

Sources

Ministry of Finance and Public Credit (2023). Mexico’s Sustainable Taxonomy. First Edition, 2023.