Overview

Mexico has a population of over 125 million people, occupying the 11th place among the most populated nations in the world. It has a total area close to 2 million square kilometres – placing it in the 14th place at a global level – and is one of the most important centres of cultural and biological diversity on the planet. In response to these realities and its own challenges, efforts have been made in Mexico to mitigate climate change, avoid social inequality, and strengthen the regulatory framework for a better coexistence of its inhabitants. Therefore, the implementation of environmental, social and governance (ESG) factors are and will continue to be important to consolidate these efforts.

This article will describe briefly four of the main ESG trends and developments in Mexico: (i) the publication of the Sustainable Taxonomy and the Sustainable Finance Mobilisation Strategy, (ii) the increasing issuance of sustainability-linked bonds, (iii) the landscape of carbon markets in Mexico, and (iv) the growing efforts to tackle gender inequality.

The Mexican Sustainable Taxonomy and the Sustainable Finance Mobilisation Strategy

The Mexican Sustainable Taxonomy

The Mexican Sustainable Taxonomy (the “Mexican Taxonomy”) was published on 17 March 2023, by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) (the “Ministry of Finance”). The Mexican Taxonomy is a classification system that allows the identification and definition of activities, assets, or investment projects with positive environmental and social impacts, based on established goals and criteria. It aims to reflect national priorities in terms of sustainability, considering the state of technological development and productive capacity in the country, while it seeks to contribute to Mexico’s compliance with its international commitments in terms of sustainability, including the Nationally Determined Contributions (NDC) and the Sustainable Development Goals of the 2030 Agenda.

This first edition of the Mexican Sustainable Taxonomy is divided in three chapters. The first one is the sustainable taxonomy framework, which encompasses an introduction to sustainable finance, the methodology for determining the projects that can be considered sustainable, as well as their contribution to the Sustainable Development Goals of the 2030 Agenda and details of its implementation. The second chapter refers to climate change mitigation and adaptation, which involves the reduction of climate risks due to each economic activity and the criteria involved to determine the related risks. The third chapter is related to equality of gender as a priority objective, providing criteria to assess organisations seeking to close gender gaps.

The second chapter of the Mexican Sustainable Taxonomy works as a catalogue that establishes, for each economic activity described therein, the requirements (and the metrics that will be used) to consider such activity as a sustainable one. The Mexican Taxonomy classifies 124 activities in six sectors:

• agriculture, breeding and exploitation of animals, and forest use;
• generation, transmission, distribution and commercialisation of electrical energy and water supply;
• construction;
• manufacturing industries;
• transportation; and
• waste management and remediation services.

These six sectors were picked after evaluating the importance of such for Mexico’s development and financing flows. Additionally, actors pertaining to them are intended to contribute as much as 94% of the mitigation goals established in Mexico’s NDC.

The evaluation of the activities is carried out according to technical evaluation criteria (criterios de evaluación técnica, CETs). This methodology is used to determine if activities are sustainable or not based on the assessment of a main parameter (eg, mitigation of climate change), the substantial contribution to sustainability (eg, amount of greenhouse gas emissions), criteria of no significant environmental damage (eg, no damages to main parameters) and minimum safeguards (eg, compliance with Mexican regulations, permits and licences, as applicable).

One of the main purposes of the Mexican Taxonomy is to provide investors, lenders, and companies with reliable information to:

• reduce transaction costs for green and sustainable financing;
• define the foundation of multiple standards, products and asset classes;
• know the preferences of market participants;
• build confidence in the market, promote liquidity and facilitate the flow of capital;
• redefine regulatory requirements;
• act as a basis for the development of public policies; and
• accelerate the transition towards a sustainable economy.

The Mexican Taxonomy has two main objectives that are linked to climate change. Firstly, it aims to mitigate climate change, and secondly, it aims to adapt to climate change across various economic sectors such as agriculture, energy, water, manufacturing, transportation, construction, and waste management. Thirdly, the Mexican Taxonomy considers a social objective: gender equality, which applies to all sectors of the economy.

The Mexican Taxonomy uses the gender equality index (indice de equidad de género, IGI) as its primary tool to evaluate how much an organisation is contributing towards achieving gender equality goals. The IGI quantifies an organisation’s contribution through three main areas:

• ensuring fair employment opportunities (equal pay, equal access to training and advancement);
• ensuring equal access to healthcare, goods, and services with consideration for gender; and
• promoting social inclusion through participation in value chains and active involvement of women.

The Mexican Taxonomy is currently in its first edition and may add new sectors and activities based on user feedback. Market participants, including regulators and financial entities, are expected to analyse and discuss how such Taxonomy can be implemented in Mexican financial regulations.

The Sustainable Finance Mobilisation Strategy

On 18 September 2023, the Ministry of Finance presented the Sustainable Finance Mobilisation Strategy (the “Strategy”). The Strategy has the potential to mobilise up to MXN15 trillion from 2023 to 2030, through objectives and lines of work voluntarily adopted by the public, private and social sectors. The Strategy is a guide for the transformation of the Mexican financial system towards sustainability and lays the foundations to mobilise and reorient financing towards activities and projects that generate positive impacts on the environment and society.

For such purposes, the Strategy contemplates three specific objectives: (i) access to financing for sustainable projects, (ii) the disclosure of information on sustainable financing, and (iii) innovative financing instruments to diversify sources of sustainable financing.

To meet its general objective and its specific objectives, the Strategy is divided into the following three pillars: (i) Sustainable Public Financial Management, (ii) Mobilisation of Sustainable Financing, and (iii) Transversal Actions.

The first pillar is closely related to public financing; that is, the Mexican government is expected to promote sustainable, responsible, and transparent management of the use of public resources, including actions to minimise tax risks associated with climate change and biodiversity loss.

The second pillar focuses on facilitating a favourable environment to promote the transformation of debt and capital markets, in order to significantly increase and redirect financing flows towards sustainable activities and projects; that is, the vision of sustainability will be promoted in the institutions that form the basis of the Mexican financial system, through financial policy and regulation actions.

The third pillar seeks to ensure compliance with the Strategy without leaving anyone behind, including gender “mainstreaming”.

The Strategy contemplates 19 lines of work (which include, among others, climate and biodiversity related fiscal risks, sustainable corporate governance, implementation of Mexico’s Sustainable Taxonomy and sustainable measures in legislation) and 97 strategic activities among the three pillars, which due to their priority and degree of progress could be implemented in the short, medium, and long term. To measure and report the Strategy’s progress, each line of work has specific goals related to financial mobilisation, public policies and financial regulations and mechanisms for financing.

While the Strategy serves as a guide for the realisation of national commitments in sustainability, it is highly likely that in the short term these goals will be translated into specific policies, regulations, legislation, and additional incentives. These will undoubtedly have an impact on the private sector, recognised as a key agent and leader in the development of sustainable projects.

Sustainability-Linked Bonds and Thematic Bonds

Sustainability-linked bonds (SLBs) are debt instruments issued by a company whose financial characteristics can vary depending on whether the issuer achieves certain ESG objectives. In other words, SLBs are instruments whose main purpose is to promote sustainability from an ESG perspective and which regularly serve to finance the general operations of issuers.

To achieve a certain homogeneity, the International Capital Markets Association (ICMA), which brings together a significant number of financial institutions globally, has developed certain principles that include recommendations on aspects of the structuring, disclosure and reporting of this type of bond. In addition to achieving homogeneity, these principles aim to promote transparency and increase the volumes of capital invested in this type of instruments. The principles have five main components:

• the selection of key performance indicators (KPIs);
• the calibration of sustainability performance targets (SPTs);
• bond characteristics;
• reporting; and
• verification.

For many market participants, SLB are instruments that strengthen the characteristics of other types of bonds, such as green bonds or social bonds, whose principles and components were also published by ICMA prior to the publication of the principles of SLBs. The major differences between green bonds/social bonds and SLBs are that (i) green bonds/social bonds focus on the use of resources obtained through their issuance for a specific project while the resources obtained through the issuance of SLBs can be used for general corporate purposes or uses, and (ii) green bonds/social bonds do not necessarily imply modifications to the financial characteristics of the issuance (for example, changes to the interest rate, to the redemption date, or to the possibility of early redemption of the instruments) as could happen in the case of SLBs if the respective KPIs are not met.

In Mexico, not only have investors shown greater interest in these instruments with an ESG component (as explained in the following paragraphs), but also regulators have promoted the incorporation of ESG principles in the analysis of investments and risks that must be carried out by various financial institutions. A clear example, are the amendments made to the Circular Única Financiera, which constitutes a fundamental part of the regulation of the Retirement Savings System in Mexico and which states that a strategy of investing using ESG criteria or factors can help investors look beyond traditional financial reports and better understand a company’s long-term risk and return prospects. In particular, through said Circular, it was established, among other issues, that as of 2022, (i) the financial risk committees of each pension fund had to integrate ESG factors into their methodologies and measurement elements, as well as policies for the administration and exposure to ESG risks of the investment portfolio of such pension funds; and (ii) the investment strategy of each pension fund had to be subject to ESG principles.

The issuance of thematic bonds (which include green bonds, social bonds, sustainable bonds and SLBs) by Mexican issuers in the local market have been increasing in recent years. According to information from the Mexican Green Finance Advisory Board (Consejo Consultivo de Finanzas Verdes de México):

• in 2019 thematic bonds were placed for an amount of MXN10.2 billion (approximately USD582.86 million);
• in 2020 for an amount of MXN66.71 billion (approximately USD3.8 billion);
• in 2021 for an amount of MXN185.452 billion (approximately USD10.6 billion);
• in 2022 for an amount of MXN253.970 billion (approximately USD14.5 billion); and
• as of August 31 of 2023 for an amount of MXN200.051 billion (approximately USD11.4 billion).

The numbers mentioned in the previous paragraph reflect a new reality in the issuance of bonds: the growing interest of investors in ESG issues, as well as a long-term vision of various Mexican issuers that seek not only to raise awareness, but also to force themselves to take care of the resources they use in the development of their businesses.

Carbon Markets in Mexico: A Path to Environmental and Economic Sustainability

Since 1997, and as part of the Kyoto Protocol and the subsequent adoption of the Paris Agreement in 2015, Mexico has actively participated in international efforts to combat climate change and reduce greenhouse gas emissions, committing to reduce its emissions by 22% by 2030 and to achieve a carbon-neutral economy by 2050. To achieve this ambitious goal, Mexico has implemented several strategies, one of which is the establishment of carbon markets. Carbon markets have emerged as a powerful tool with the publication of the General Law on Climate Change in 2012, which formally and bindingly establishes the progressive and gradual implementation of an Emissions Trading System (ETS).

This emissions market operates on the principle of “cap and trade”, setting emission reduction targets for participating sectors and companies. This system is based on the progressive and gradual establishment of an emissions trading system with the aim of promoting measurable, reportable and verifiable emissions reductions without undermining the competitiveness of participating sectors in international markets. Companies that exceed their emission allowances must purchase emission credits from companies that have reduced their emissions below their allocated limits.

The ETS initially focused on sectors with high emissions potential, such as energy and industry. As the system evolved, it expanded to include additional sectors, broadening its impact and reducing emissions. Under the ETS, companies that reduce their emissions below their allocated allowances can generate carbon emission credits. These credits can be traded on the carbon market, providing a financial incentive to reduce emissions.

Each year, the Mexican government, through the Ministry of Environment and Natural Resources (SEMARNAT), issues each facility an emission cap (a free emission allowance); this is the amount of tons of CO₂ that a facility can emit without paying a market permit or penalty.

The emission allowances for each facility are determined by its emission history. Throughout the year, the facility must account for and verify its emissions, and two things can happen during this accounting process: (i) if unused allowances remain, they can be sold or reserved for the next year; or (ii) if the emission limit is exceeded, it is possible to buy excess allowances from other participants, purchase carbon credits from external projects, or pay the penalty.

The ETS was structured to operate in two phases: (i) the pilot phase and transition phase, and (ii) the operational phase. During the first phase, participation in the ETS was voluntary, allowing companies to gain experience with the system. During the second phase, participation is expected to be mandatory – strictly speaking, the operational programme began on January 1 2023 – however, SEMARNAT has not yet issued the rules for the operation of the ETS.

Along with the creation of the regulated carbon market, the voluntary carbon market has developed in Mexico. This operates in parallel with the mandatory regulated carbon market.

The voluntary carbon market is a mechanism through which companies and individuals can offset their CO₂ emissions on a voluntary basis and enables companies to make their services and products carbon neutral; ie, the carbon footprint of the product or service has been offset by the purchase of carbon credits, thereby neutralising its environmental impact, and participation is in response to environmental objectives, mainly related to corporate social responsibility or reputational issues.

In this market, private companies or individuals can choose to purchase verified emission reductions or carbon credits to fund sustainable projects ranging from reforestation and renewable energy to methane capture initiatives, allowing them to align their carbon reduction efforts with their values.

Voluntary carbon market projects seek to generate emission reductions in an unregulated manner, so they are not mandatory and are purchased by companies or institutions to meet their environmental responsibilities, rather than used to meet ETS obligations or international commitments as in the regulated market.

The fundamental difference between regulated carbon markets and voluntary carbon markets is regulation. Regulated markets are mandated and controlled by government policy, whereas voluntary markets operate on a voluntary basis without regulatory enforcement. Voluntary carbon markets are for public and private organisations and citizens who want to take responsibility for their climate actions. Also, regulated markets focus on compliance with mandatory emission reduction targets, while voluntary markets allow participants to choose carbon offset initiatives according to their preferences and values. In addition, in regulated markets, participation is mandatory for certain sectors, while voluntary markets attract participants based on their willingness to engage in carbon offsetting activities. The synergy between these two approaches can accelerate Mexico’s progress toward a more sustainable, low-carbon future.

Mexico’s Rising Commitment to Gender Equality

In Mexico, customs and societal norms have created barriers to women’s full participation in the workforce and in governance roles, leading to wage gaps, under-representation of women in managerial roles, and an unequal division of household duties. Furthermore, the alarmingly high rates of gender-based violence, including “femicide”, highlight the urgent need for action.

Although the country still has a very long way to go, in the last years, Mexico has seen growing efforts to deal with gender inequality, including in regard to unequal pay and access to management and “C-suite” positions, particularly from the private sector and NGOs.

A significant effort toward achieving gender diversity in corporate governance was the recognition a few years ago by Mexico’s Business Co-ordinator Counsil (Consejo Coordinador Empresarial) of the importance of gender diversity (particularly, referring to women) on the boards of directors and the inclusion of the recommendation of having women form part of boards in Mexico’s Code of Best Corporate Governance Practices. Although this Code and its provisions are not legally binding, they provide significant guidelines for Mexican companies, public and private. Major players, such as Mexico’s two Stock Exchanges, encourage companies to follow these recommendations.

These guidelines are complemented by legislative efforts, including proposed reforms to Mexico’s General Law for Commercial Companies (Ley General de Sociedades Mercantiles) and Mexico’s Market Securities Law (Ley del Mercado de Valores). If enacted, these reforms would allow Mexico’s Ministry of Finance and Public Credit to issue regulations to strengthen gender equality as well as legally require the inclusion of women on boards, marking a substantial step toward gender diversity in corporate governance.

Further, the two stock exchanges in Mexico, Bolsa Mexicana de Valores (BMV) and Bolsa Institucional de Valores (BIVA), are promoters of diversity and gender equality in Mexico and have achieved important milestones.

Advancing these efforts, the BIVA and Bloomberg collaborated and issued a Gender Equality Index. This index provides a data-driven approach to assess and measure the progress in gender equality among listed companies. Further, it highlights companies leading in this area and serves as an incentive for other organisations to adopt similar practices. In addition, although not legally binding, as of 2023, BIVA’s new initiative consists of requiring issuers to fill out a diversity questionnaire and disclose their diversity efforts in their annual report.

In the broader financial landscape of Latin America, gender-labelled bonds have emerged as a notable instrument to channel investment toward gender-inclusive projects. According to information published by HR Ratings, out of the 14 gender-labelled bonds issued across the region, Mexico has contributed five. This financial innovation underlines the growing convergence of gender equality with economic strategies and adds another layer to Mexico’s multifaceted efforts to advance gender equality.

In 2023, the Mexican government further emphasised the need to address gender equality by launching the above-mentioned Sustainable Taxonomy and Sustainable Finance Mobilisation Strategy. These documents and the efforts behind them are a clear indication of the growing recognition of gender issues within Mexico’s sustainable development goals.

Companies in Mexico, both public and private, are progressively incorporating gender diversity and equality policies, ranging from mentorship programmes to policies explicitly promoting equal pay. However, despite these efforts, equitable representation remains a long-term goal rather than an immediate achievement.

Even with these foundational steps, challenges abound and there is still much to do to eradicate gender inequality. However, the winds of change are blowing stronger than ever, partly fuelled by the increasing demand from stakeholders and partly, by a historic upcoming political event: for the first time, two women are among the frontrunners for the Mexican presidency. This unprecedented scenario could accelerate the momentum for broader legal and political reforms aimed at achieving gender equality.

Considering the evolving initiatives and the shifting sociopolitical landscape in Mexico, gender diversity and equality are slowly becoming increasingly integral to corporate governance and compliance frameworks. Ignorance of this paradigm shift may result in legal liabilities and reputational damage, while proactive engagement will position a company favourably in a market increasingly conscious of these concerns. Therefore, companies must remain vigilant and responsive to this growing focus in both the legal framework and broader business ecosystem.