In order to increase private finance for biodiversity, governments need to put in place a comprehensive sustainable finance strategy. As one element of a larger policy strategy, sustainable finance taxonomies can potentially play a pivotal role in this regard. By providing scienced-based common and standardized definitions for economic activities that substantially contribute to the protection and restoration of biodiversity and its ecosystems, taxonomies aim to increase transparency on financial markets and help market participants to align their investment decisions with sustainability considerations. Taxonomies are critical to Global Biodiversity Framework’s implementation since can contribute to measure and tracking private biodiversity finance. Translating scientific concepts into concrete economic activities makes it easier for the private sector entities to identify biodiversity-oriented investments.

For this reason, sustainable finance taxonomies are being developed at a rapid pace. To date, there are more than 40 initiatives that are in place or that are currently being developed. Most sustainable finance taxonomies have focused on climate change objectives of mitigation and adaptation as a priority. However, more and more sustainable finance taxonomies around the world, following the European Union leadership, are defining other environmental objectives beyond climate change. Particularly, in the LAC region, Colombia is taking the lead and started to develop its Green Taxonomy 2.0, which includes the environmental objective of “conservation and sustainable use of biodiversity and its ecosystems”. However, more LAC countries have already announced their plans in developing biodiversity-related taxonomies in the short term such as Brazil, Costa Rica, and Mexico.

Biodiversity-related taxonomies, with well-defined metrics and reporting requirements, provide a common terminology for companies, financial institutions, and investors to manage investment decisions, as well as for regulators, governments, and other stakeholders to develop public policies. These efforts can create a conducive environment for private sector engagement in biodiversity conservation and restoration.

A key challenge is ensuring consistency and interoperability between taxonomies across borders, while considering the specificities of national and regional contexts. Alignment or interoperability is important given that a key driver for taxonomy development has been the lack of consistency in defining environmentally sustainable activities, which has hindered a scaling up of sustainable investment. A lack of interoperability is likely to lead to market fragmentation that will restrict the flow of capital into this type of investments and create hurdles for international trade.

Increased regional and global alignment does not imply a “one size fits all” solution. It is needed to find the appropriate balance between local context (national priorities and industry standards) and define frameworks that are interoperable.

Interoperability implies that taxonomies must be based on similar guiding principles, have design elements such as objectives, industry classification systems for sectors and activities that are comparable and are similar in approaches and methodologies used for defining technical screening criteria (i.e. including both substantial contribution and do no significant harm criteria), while considering local specificities.

Most countries are interested in enabling interoperability and adopting successful approaches from other countries. Considering the state of play of biodiversity-related taxonomies in the region and worldwide, there is a momentum for countries to stablish compatible and interoperable frameworks on sustainable finance not only at a regional level but also globally that will facilitate smoother cross-border capital flows for this type of investments, lower transaction costs, and mitigate greenwashing risks.

This side event, jointly organized by the participating institutions of the Working Group on Sustainable Finance Taxonomies for Latin America and the Caribbean seeks to use the opportunity of the sixteenth meeting of the Conference of the Parties to the Convention on Biological Diversity (COP16), to be hosted in Cali, Colombia, to provide a platform to exchange on:

1. The contributions that sustainable finance taxonomies can play in creating an enabling environment for the private sector to engage in biodiversity conservation and restoration;
2. The importance of interoperability across biodiversity-related taxonomies to mobilize cross-border capital flows and;
3. Present one practical example of international best practice to enhance interoperability “the LAC Taxonomy Common Framework for Biodiversity”.

The LAC Taxonomy Common Framework for Biodiversity provides a model framework to support LAC countries in developing their own taxonomies aligned with global best practices, while ensuring that the region’s priorities, and social, economic, and cultural diversity is fully considered. It sets guiding principles and methodologies for defining the main structural elements of taxonomies, enhancing comparability and interoperability of taxonomies across the LAC region and internationally. The framework will provide technical guidance for prioritization of sectors, selection of economic activities, and options for defining metrics and thresholds for economic activities to help determine substantial contribution to the biodiversity objective in taxonomies. Biodiversity objectives are not yet fully developed in taxonomies globally and hence this framework can provide technical guidance to taxonomies outside of LAC as well. This framework supports LAC member states to encourage capital flows towards common biodiversity-related goals and support cross-border investments and serves as an interoperability tool for policymakers, financial regulators and supervisors, and central banks aiming to adopt global best practices in sustainable finance taxonomies.

The lessons learned from regional and international experience with biodiversity-related taxonomies have directly informed the development of the LAC Taxonomy Common Framework for Biodiversity. The LAC Taxonomy Common Framework for Biodiversity, through its focus on regional needs and scientific foundation, can serve as a stepping stone for global discussions on biodiversity finance.  It sets an example for other regions and paves the way for a more common and standardized approach to invest in economic activities that protect, restore, and utilize biodiversity in a sustainable manner. 

The LAC Taxonomy Common Framework for Biodiversity benefits from the support of the European Commission through the EUROCLIMA Programme and the EU technical expertise which will continue to be channeled through the Sustainable Finance Advisory Hub for low- and middle-income countries. Both the EUROCLIMA Programme and the Hub are key initiatives of the EU Global Gateway Investment Agenda aiming at developing robust frameworks, ensuring confidence and transparency, and attracting EU and international private capital for green and sustainable projects.