The country’s financial authorities may evaluate potential regulatory efforts in conjunction with the Taxonomy following its rollout.

By Austin J. Pierce

In March 2023, Mexico published a finalized version of the country’s Sustainable Taxonomy (the Taxonomy), growing the increasing number of jurisdictions that have developed such a framework. At their core, these frameworks aim to provide parameters for what is considered “sustainable,” thereby combating greenwashing and providing clarity to markets for discussing sustainability in terms of investment products and economic activities. However, these taxonomies are not uniform; instead, they adapt to the distinct considerations and priorities of their respective jurisdictions. Mexico similarly takes a distinct approach with the Taxonomy, incorporating a substantial focus on social as well as environmental parameters.

This blog post discusses the general structure of the Taxonomy and how it may impact sustainability claims and offerings for companies doing business in or with the country.

Structure of the Taxonomy

The fundamental structure of the Taxonomy mirrors that of the EU Taxonomy, though the scope and criteria of these requirements has been adjusted:

“Substantial Contribution” to a Core Objective

The core environmental objectives mirror the EU Taxonomy:

1. Climate change mitigation
2. Climate change adaptation
3. Water & marine resource management
4. Ecosystem conservation & biodiversity
5. Circular economy
6. Pollution control & prevention

However, Mexico builds on this with the identification of several social objectives as well:

1. Gender equality
2. Access to basic services related to sustainable cities (including dwellings, public transport, waste management, water management, and use of land and pollution)
3. Health
4. Education
5. Financial inclusion

Similar to the EU Taxonomy which references NACE (Nomenclature of Economic Activities) codes, the requirements for “substantial contribution” to such objectives vary by economic sector, with NAICS codes specified for each sector to determine inclusion. For example, Mexico has taken a similar path to Colombia for the energy sector, excluding natural gas and nuclear from eligibility under the energy sector in the Taxonomy.

Eligible economic activities must then meet technical criteria. In some cases, these are quantitative, such as a threshold of 100 kgCO₂e/MWh for climate change mitigation for many energy activities. But other sectors and objectives use qualitative or scoring measures. For example, substantial contribution to gender equality is measured via a survey, requiring a minimum score both on particular survey sections and overall.

“Do No Significant Harm” Requirements

Activities must also meet “do no significant harm” (DNSH) requirements in order to be considered “sustainable.” As with the substantial contribution criteria, these requirements are sector-specific. However, at present, these DNSH requirements only apply to the Taxonomy’s environmental objectives.

Minimal Safeguards (for Social and Governance)

The Taxonomy addresses negative social impacts by requiring activities to meet certain minimal safeguards for social, as well as governance, considerations. These safeguards reference both Mexican law and key international frameworks, including the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and the International Labor Organization Declaration on Fundamental Principles and Rights at Work.

Application of the Taxonomy

Use of the Taxonomy is currently voluntary; however, it is nonetheless expected to provide an influential framework to guide capital flows in the jurisdiction that are focused on sustainability. Several initiatives are planned over the course of 2023 to support the Taxonomy’s rollout, including the development of certain tools to facilitate understanding and adoption. Additionally, Mexico’s financial authorities have indicated they plan to evaluate potential regulatory efforts in conjunction with the Taxonomy following its rollout.

Companies and financial institutions considering issuing, lending to, or underwriting sustainable finance instruments or otherwise promoting the sustainability of their activities in Mexico may wish to assess the Taxonomy to understand how, and whether, their operations or lending practices align. While practical implementation will likely evolve as entities become more familiar with the Taxonomy, assessing compliance will inherently require more than an assessment of a select handful of key performance indicators or performance targets. Both the safeguards and various “do no significant harm” requirements depend on company policies and ESG governance.

Multinational enterprises should consider how the requirements may interact with those in other jurisdictions. For example, companies offering social bonds into Mexico may now wish to consider environmental criteria to demonstrate that they meet “do no significant harm” requirements. Similarly, multinational companies may need to craft distinct disclosures to address the difference in sustainability criteria and eligibility in cross-jurisdictional offerings, including from both issuer and capital provider perspectives.