Mexico’s deputy finance minister Gabriel Yorio has told GlobalCapital that he hopes the country's new sustainable taxonomy, which he presented to investors in New York last week, will promote more thematic bond issuance in the domestic market. Yorio also expects it to supplement efforts to attract more international buyers into the country’s domestic corporate bond market.
In March, the finance ministry presented the taxonomy to the Association of Mexican Banks, looking at 124 economic activities across six sectors. The initiative took its inspiration from the European Union’s green taxonomy, but is novel in that it encompasses both environmental and social dimensions.
“We’re in New York presenting the taxonomy to investors because we think that it will promote more thematic bonds issuances in the local market,” said Yorio. “That's the main objective of the of the taxonomy: to ringfence and develop our local market, and to have new issuers develop specific markets.
“For example, the gender bond market is one that we're really focused on.”
Gender equality is one of the three main objectives of the taxonomy — alongside climate change and access to basic services.
Beyond the corporate sector, Mexico’s 32 sub-national issuers (31 states plus Mexico City) should also be able to issue thematic bonds with the help of the taxonomy.
Necessary guidance
Around 200 experts from government, the private sector, financial sector, academia, NGO and multilaterals were consulted on the taxonomy, which Yorio said he prefers to present as “the taxonomy of Mexico”, rather than as a document elaborated by the finance ministry. For now, at least, it will simply be a guide that standardises the way the environmental and social impacts of economic activities are measured — rather than a piece of legislation or regulation.
“Even in Europe, they are still discussing what is the best way to transit towards regulation,” said Yorio. “We need to back test it, and eventually we will find the best way [to incorporate it].
“We still need to figure out who would be, for example, the supervisor in charge of either publishing the taxonomy or carrying out the oversight. And we need to develop the second and third-party opinions so there are checks and balances.”
Still, a guide may be enough to encourage Mexican investors to participate more actively in the sustainable debt market.
“Certain institutional investors, such as the insurance companies or the Afores [Mexico’s pension funds], would like to buy more sustainable assets,” said Yorio. “However, either they can’t find them, or they don't know if they are actually green. Now, all the buyers or the investors will know exactly the quality of the sustainable asset and the taxonomy helps avoid any suspicion of greenwashing.
“It's about [the issuer’s] commitment and transparency, and for investors that’s of high value.”
HR Ratings, the Mexican credit rating agency, says that it believes the taxonomy eliminates “one the main challenges and barriers” to thematic debt markets in Mexico: “the lack of criteria to classify activities, assets, and/or investment projects with a significant sustainable impact”.
“Having a document that contains minimum criteria to categorise an environmental or social project, based on unified scientific fundamentals, will facilitate the mobilisation of capital towards sustainable activities,” said HR in a recent report on the taxonomy.
Mexico’s domestic government bond market is one of the most popular and liquid in emerging markets among international investors. But efforts to bring international participation have had relatively limited success, and as such the Mexican corporate bond market remaions dominated by a handful of large pension funds.
Financial hub aims
When asked if the taxonomy might help lure more international buyers into the domestic corporate bond market, Yorio hinted that it might be possible — alongside other reforms.
“We're carrying out several reforms in our local financial market — not only about ESG,” he said. “We have another [initiative] more related to competition and simplification of processes.
“We want to do it and that’s one of the reasons why we are here promoting our market.”
These reforms are part of the government’s aim to turn Mexico into a financial hub for Latin America, said the deputy minister.
“We have the infrastructure, we have clearing houses, we have two stock exchanges, we have a strong currency that is traded 24 hours a day,” said Yorio. “We think that there are a lot of characteristics that should enable Mexico to become one of the important financial hubs in Latin America.
“[This would not only be for] Mexican corporates, but eventually also for Latin American companies to take advantage of the market.”
Beyond fixed-income
Although bond markets have played a leading role in the world of sustainable finance, Yorio also sees other avenues for Mexico to take advantage of the taxonomy. He highlighted that both Mexico’s stock exchanges, BMV and BIVA, already have sustainable indices. Those sustainable indices are related to companies’ investment programmes, and the taxonomy should help to identify if such investments are eligible green or social projects.
But Yorio also thinks the taxonomy can help banks to develop specific sustainable products.
“One that we have in mind is green mortgages,” he said. “In Mexico, we are already operating with a certification from the IFC so that someone outside the government or the banks can certify that a building or a house is green.
“The question is how to finance those buildings, and we could provide some incentives for cheap financing. The taxonomy includes the certification.”
Finally, excitement is growing over Mexico’s potential to take advantage of the nearshoring trend — whereby companies are relocating their supply chain to countries that are closer to where their products end up.
“Some of the activities that might be relocated to Mexico will need to comply with several regional or global requirements on ESG,” said Yorio. “In terms of supply chain, our taxonomy is practically in line with the European taxonomy.
“That will help us, for example, to facilitate the relocation of certain specific activities.”