18 de noviembre de 2022

The green taxonomy and the need for a colombian stewardship – “SCODE”


Over the last few years, the Colombian government has incorporated and implemented various ESG policies to procure a sustainable development for the country. One of them is the so-called Green Taxonomy, an instrument that creates a classification system of economic activities and their impact on the environment for the use of financial intermediaries in their dealings. Although its incorporation can be regarded as a milestone on the path to a more sustainable and green economy (and development), its unbinding character (even when being a state’s instrument) generates little certainty on the way it may help to achieve the goals set out by the government. Having a soft law instrument by nature provides little help or confidence on the way it may be interpreted and implemented by the financial sector in the country. Of course, it would also be of considerable complexity trying to implement a hard law instrument, as the dynamics, needs and resources of the country are very scare to impose ESG goals for all market participants equally.  That lead us to believe there is a need for a Colombian stewardship – “scode” (private) as an instrument that would help to reassure the principles set out by the Green Taxonomy and other government’s ESG policies and instruments as well as other transnational institution on the matter.

In the next few lines, I would refer to why I believe there is a need for a Colombian stewardship – “scode” and for that I would refer in short about the issues and challenges of Implementing the Green Taxonomy; about the role of Private regulation on ESG and finally why I believe we need a Colombian StewardshipCode”.

1. Implementing the Green Taxonomy: issues and challenges

  • A softer law instrument.

As we have already stated the Green Taxonomy is an instrument that defines a classification system for economic activities and assets looking to be a substantial contribution to the achievement of environmental objectives by the financial sector. This considering the commitments, strategies and policies outlined by Colombia. As the instrument itself explains it, it can be employed only as a reference, according to the competencies, mandates and needs of each user.

We then find ourselves with a soft law instrument, lacking in binding nature, it is not compulsory, so its application, for now, will depend on the will of the institutions of the financial sector, as well as those business that want to accept the principles and rules set up by the Green Taxonomy. That’s why the materialization of the principles on which the Green Taxonomy was developed will depend on the creation of new instruments (state or private) that allow its/their users to establish a clear application and supervision methodologies as well as the expected results and the consequences of non-compliance.

  • Multiple stakeholders – multiples criteria on the interpretation and implementation – Regulatory arbitrage.

The Green Taxonomy will have multiple interpreters; different users: companies, investors, financial entities (public and private), consumers and others. This may lead to a great diversity of methods for its implementation and of course different results, which could vary depending on the way in which each market agent has decided to apply it. This situation can then lead to the existence of multiple regulatory standards, not being equally applicable to all and with different results. Markets may have multiple rules, created by each financial institution based on the way each of them interprets what is stablished in the general framework. This can lead to a rule fishing, with business going to the institution that implements the less demanding rules.

  • Global (international) Banks – global ESG rules?

Another problem that may arise with the Green Taxonomy is related to the implementation of international standards at the local level. Many of the banks that carry out activities in the country are or belong to transnational organizations that, as a rule, implement transnational standards that in many cases are trying to achieve goals different to those that may be pursued in the local field. The rules that have been developed in the global sphere usually respond to global issues or interests, which in many cases may differ from the local realities of each country or each region.

This is the case of developed countries, where what is sought with the implementation of ESG Rules is the mitigation of the environmental impact, while in the case of developing countries the needs and goals may differ depending on the reality of each country, in many cases aiming at protecting social rights or improving the living conditions of their citizens.

  • A different economic and social reality and challenges different goals and different ESG rules.

We believe that it will always be more efficient to have local rules that consider the global developments but without ignoring the economic and social reality of the country. This reasoning shall apply to Colombia, a country in which, due to the economic and social conditions, the ESG criteria should be more focused on the social component. Of course, without abandoning the environmental factor.

As can be seen from the text of the Green Taxonomy, the activity that generates the greatest negative impact on the environment is deforestation, an activity that is directly related to illicit activities such as drug trafficking and as such not a target for the instrument, meaning the Green Taxonomy is not going to be applied for drug dealers. Furthermore, Colombia is a country with 22 million people submerged in poverty and that should always be considered when implementing ESG rules and policies.

2. Private regulation’s role on ESG

In this context it is necessary to bear in mind the importance of private regulation for ESG. Private organizations have recently established numerous programs aimed at improving the environmental and social performance of industry. Many of the new programs seek to define and enforce standards for environmental management, and to make it difficult for producers not to participate in them. They claim to promote public interest, taking on functions generally performed by governments and in many cases displacing them. Private environmental programs have the potential to reshape domestic and international policy institutions by changing the focus, the dynamics, and substance of policymaking.

In the field of ESG the activity of NGOs has been so relevant that in many cases the large multinationals and/or local governments end up participating on their programs, forming a group of institutions that seem to be on a different level (because of the very participation of industries and States in them). In this group, institutions such as the World Wildlife Fund (Known in Colombia simply as the WWF), Greenpeace or Amnesty International stand out; Extractive Industries Transparency Initiative; Fair Labor Association, among others.

In short, given their usefulness and the way in which they have diversified, these standards have become the ideal mean for markets, States, multilateral organizations and, of course, private agents, for the prevention of risks arising out of the business world.

  • Civil Regulation successfully implemented in Colombia.

Colombia is not a country alien to this reality. In recent years we have observed a considerable increase in the incorporation of this type of (private) regulation into the local legal order. Issues that were previously considered exclusive to the public sphere have been opened and are regulated by this type of instruments (private). The regulation and supervision of the securities market, the implementation of accounting and phytosanitary standards, the creation of rules and technical standards in the energy, mining, and oil industry are all part of this group.  The internationalization process of our country has also generated the need to regulate new contracts, trade agents, their products and activities. Issues such as the global interconnection system/network (internet), advertising, the quality of foods and medicines are regulated, for the most part, by standards created by private institutions.

In the field of ESG, we have also observed a substantial increase in private participation in the creation and implementation of our own standards. Beyond the programs that our companies have been developing by their own, we have also observed the creation of NGO´s dedicated to creating and implement these rules.  That is the case of: The Alliance for Responsible Mining (ARM) and ASOMIRCOL (Association for Responsible Mining and Fair Trade of Southwest Colombia); both private organizations working on the implementation of environmental and social standards in mining, particularly artisanal mining, an economic sector that generates a great social and environmental impact due to the use of outdated extraction methods, which in most of the cases do not consider the environmental or social factors. Similarly, we have seen the proliferation of fair-trade instruments. Currently, the country has more than 200 organizations certified by FAIRTRADE, particularly organizations and companies dedicated to coffee and bananas business.

  • The need for a Colombian Stewardship Code orSCode

All this led us to belive that we need a Colombian Stewardship Code orSCode”. The next steps in the process of construction and development of the Green Taxonomy should look for the development of complementary tools/instruments to facilitate its implementation and appropriation.

This leads us to consider the need for and the importance of developing and implementing a Stewardship Code in Colombia. Taking as a reference the experiences of other countries and sectors in the matter, as well as the Colombian experience with the Código País, an instrument that was very useful for our economy in terms of good corporate governance. Colombia needs to promote and incorporate an instrument in which the spirit, principles and general rules set out in the Green Taxonomy materialize. We consider that an instrument in the form of a code or statute of a private nature could successfully carry out the purposes of the Green Taxonomy.

  • Again: local realities local rules.

Colombia is committed to growth and sustainable development, including medium and long-term objectives that have positioned the country as a leader in the international agendas of biodiversity, climate change, energy transition, among others.  For this reason, the country is developing policies and strategies aimed at environmental goals, seeking to achieve a balance between growth and sustainable development, the well-being of the population and the environment. Off course, always trying to encourage the mobilization of resources to social programs and the transition to a sustainable and low-carbon economy.

As we have already anticipated, the Colombian Stewardship Code should be adapted to our realities. Taking into account the risks associated with climate change and our social and economic reality the instrument shall focus on the analysis of our needs and resources, and also the ability to adapt of our people, the economy and our ecosystem to the current and future climate and economic threats.

This instrument should allow us to:

  • Apply the general principles set out in the Green Taxonomy and other local and global instruments.
  • Create a common language that clarifies the lines of liability and the duties of all those who take part in the investment chain. Not only in consideration of the need to obtain financial resources for the company, but also based on the needs that the country faces in social and environmental matters.
  • Incorporate a regulatory tool for ensuring that climate, environmental and social factors (local) are fully integrated into the financial decision-making in all sectors. Including the state financial entities, as well as public organizations that receive resources from the financial world.
  • It will also allow us to encourage the adoption of ESG (Environmental, Social and Good Governance) criteria from the local perspective. Particularly, considering the resources available in the country, and not just the aspirations of a few who in many cases are unaware of our social and economic reality.
  • It will also important to acknowledge the role of the extractive sector in the country’s finances and in its economic and social programs, the issues at hand and the opportunities for improvement.
  • Finally, it also helps to strengthen the capacities of ministries, territorial entities, and government supervisors. This, taking into account the limited resources available to the Colombian state for the implementation of ESG policies and for the support of the private sector and communities in these matters.

We are sure that a code with these attributes will be very useful on helping the country on achieving the goals and a proper social and environmental agenda.