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In the Era of Sustainable Finance, Do We Have Enough Data?

By Alba Aguilar - Consejo Mexicano de Finanzas Sostenibles – CMFS
General Director


By Alba Aguilar | Director General - Wed, 03/08/2023 - 10:00

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We all know the value of information and its power to develop new markets. We know that if prices reflect all available information, then we say that the market is efficient; even more, if you have insider information you could have a competitive advantage, and if you have access to all market information, then you will make better investment decisions. 

But what if we are influenced by others, if we do not make our own analysis and do not express our point of view? We will have a systematically influenced market, where the participants are not independent and, therefore, the prices or value of the assets do not reflect all the available information.

In the era of sustainable finance, ESG disclosure, carbon pricing, and value at risk for biodiversity loss are the new data. This is the information that will help us to make a better analysis when we value companies, assets, and projects; it is the data that will allow us to make better decisions for financing and investing toward 2030 and 2050. It is the necessary information to analyze the state of the market and define public policies, which include norms, regulatory frameworks, incentives, and taxes, for example.  All this to address the impacts of climate change and social gaps present in our economy, but, above all, the new data will be the new facts, evidence and references to participate in the increasingly integrated global market, with new practices, new rules, and with significant transition challenges.

So, the question is: Do we have enough data? The answer is: No. 

Although we have seen significant progress in ESG disclosures by financial and nonfinancial institutions that move beyond their traditional duties, improving their communication to different stakeholders and the quality of their reporting, there is still a long way to go. 

According to Miranda Partners' 2022 Report on Capital Market Development in Mexico, 70% of sustainability reports in Mexico include SASB standards (up from 40% in 2021 and 10% in 2020), with  the most mature sectors regarding  ESG reporting being metals and mining and FIBRAs, whereas the sector with the least maturity continues to be services and supplies.

At the same time, the market faces big challenges with the growth of labeled bonds and SLBs loans, now with greater demands to raise their frameworks’ ambition level and disclosure, incorporating science-based targets. In addition, in the short term, it will be necessary to align all the sustainable instruments with the new national taxonomy and be prepared for potential mandatory requirements.

For example, according to the International Standard Sustainability Board reporting standards (IFRS S1 and IFRS S2) on sustainability and climate, whose final version will be released in June 2023, listed companies and financial institutions must report CO2 emissions covering scopes 1, 2 and 3, where reporting on scope 3 (financed emissions) implies a huge task, since they will have to get quality data, and consistent and comparable information on a regular basis from suppliers, companies and consumers that are part of their value chain or supply chain.

Without this data, it will be difficult to account for the real amount of financed emissions, which implies not having certainty on the use of resources, or if these are going to finance stranded assets or investment projects that will lose value over time. Then, both investors and policymakers will lack clarity for analyzing, assessing and verifying the company’s performance and its corporate commitment in this area.  Neither will it be easy to implement regulatory frameworks, standards, and other measures to reduce financed emissions. 

In the same way, the lack of available ESG data is an obstacle for accounting sustainable finance in our country, a fundamental task to calculate our contribution to climate targets and sustainable goals. Also, it is key to make an efficient tracking of the existing gaps in strategic industries that have the greatest potential for CO2 mitigation, and to know which are the most efficient incentives, from green subsidies for net-zero investments or new technologies, to prime rates or fiscal mechanisms, among others, to accelerate “finance for transition.” 

On carbon pricing, we have not yet established an efficient mechanism to determine it. The carbon tax today is not an environmental mechanism that produces a significant change in consumer behavior. The development of the carbon market in Mexico is progressing slowly and we are still in the pilot stages. Some subnational governments, however, have developed policies that allow them to establish CO2 taxes at a local level, which represents an alternative to setting a price on CO2 emissions, but it is not a reference at the country level.

Last, but not least, what is the price of natural capital? What are the implications when we don't even care about loss of biodiversity, and we don’t know the financial implications? We know that there are financial risks and challenges associated with preserving and restoring biodiversity, and that the financial system plays a central role in measuring  the impact of capital and negative externalities with useful data in order to assess: ii) physical and transition risks associated with biodiversity loss; ii) advances on metrics, impact measurement tools, and disclosure practices; and iii) opportunities for capital mobilization using innovative financing structures that incorporate nature-based solutions.

Certainly, there is a lot of work to be done in terms of having more and better information, but above all, we need useful data to strengthen and scale the sustainable market in Mexico.

Photo by:   Alba Aguilar

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