Introduction to the Panamanian Sustainable Finance Taxonomy
- Samuel Fernandez
- Apr 21
- 5 min read
A Detailed Briefing of the Framework
Green finance initiatives have expanded quickly across the globe, driven in part by the need to address climate change mitigation and adaptation, and have drawn investors interested in the shift to a low-carbon economy. In 2023, Panama started developing a National Taxonomy with funding from the United Nations Environment Programme (UNEP) and in March 2024, the country launched its Sustainable Finance Taxonomy, becoming the third country in LAC and the first in Central America.
The Sustainable Finance Taxonomy of Panama ("SFTP") is a classification system intended to identify and define economic activities that aid the country's shift towards a sustainable, resilient, and inclusive economy. It offers clear, scientifically-based criteria for identifying environmentally sustainable investments and sets a common framework for understanding what qualifies as sustainable economic activity in Panama.
The SFTP is a pivotal instrument for channeling investments toward projects that align with the nation's environmental and social goals. By providing clear definitions and criteria grounded in scientific evidence, the taxonomy enhances transparency and accountability within the financial sector. This clarity not only attracts sustainable financing but also fosters a sense of trust among investors, as they can be assured that their capital is being directed toward initiatives that genuinely contribute to sustainability.
The taxonomy should serve as a roadmap for Panama's transition to a more resilient and sustainable economy. It is intended to guide the allocation of financial resources toward sectors and activities that promote environmental protection, social inclusion, and climate change mitigation.
This targeted allocation of investments should not only promote sustainable development but also encourage innovation and growth in crucial sectors, establishing Panama as a leader in sustainable finance in the region.
"The Panama Sustainable Finance Taxonomy defines what a sustainable environmental investment is for Panama and establishes a common understanding of the economic activities that contribute substantially to the country's environmental and social objectives."
Purpose and Scope
The SFTP provides a common language and a scientific framework to define environmentally sustainable investments. This framework is essential as it establishes clear criteria and guidelines that help investors, companies, and policymakers identify and classify economic activities that contribute positively to environmental sustainability. By employing a standardized set of definitions, the Taxonomy facilitates better communication among stakeholders and promotes transparency in the investment process.
Moreover, it serves as a tool for aligning financial flows with sustainable development goals, guiding capital towards projects that genuinely support the transition to a low-carbon economy. This is particularly important in the context of increasing global awareness regarding climate change and the urgent need for sustainable practices across various sectors. The Taxonomy not only aids in identifying sustainable investments but also helps in mitigating the risks associated with greenwashing—where companies may falsely claim to be environmentally friendly.
By providing a rigorous assessment framework, the Taxonomy ensures that investments labeled as sustainable meet specific environmental performance thresholds.
In addition, the SFTP should play a crucial role in fostering innovation by encouraging companies to develop new technologies and practices that align with sustainability objectives. This, in turn, can lead to job creation and economic growth within sectors focused on renewable energy, sustainable agriculture, and other environmentally beneficial industries.
Overall, the Taxonomy acts as a foundational element in the broader effort to promote sustainable finance, ensuring that investments not only yield financial returns but also contribute to the well-being of the planet and society as a whole.
Key Objectives:
The SFTP aims to:
Mobilize capital towards sustainable investments.
Enhance transparency and credibility in the sustainable finance market.
Align with international standards for interoperability with global financial markets.
Support Panama's environmental and social goals, including climate change mitigation and adaptation.
Users and Applications:
The SFTP targets a wide range of stakeholders, including:
Policymakers and Regulators: Developing standards for green bonds, financial product labeling, and disclosure requirements.
Financial Institutions: Designing sustainable financial products, managing climate risks, and analyzing portfolio performance.
Productive Sector and Issuers of bonds and other types of securities: Issuing thematic bonds, aligning with sustainability criteria, and attracting sustainable investments.
Governance and Development Process:
The SFTP's development involved a multi-stakeholder approach, overseen by a Supervisory Committee and executed by 12 Technical Expert Groups (GETs). The process included:
Initial assessment of existing policies and international experiences.
Identification and prioritization of relevant economic sectors and activities.
Development of eligibility criteria based on science and aligned with national standards.
Public consultation to gather feedback and ensure local relevance.
Environmental Objectives:
The SFTP addresses seven key environmental objectives:
Climate Change Mitigation
Climate Change Adaptation
Protection and Restoration of Biodiversity and Ecosystems
Soil Management
Sustainable Use and Protection of Water Resources and Marine Ecosystems
Transition to a Circular Economy
Pollution Prevention and Control
Sectoral Coverage:
The first phase of the SFTP focuses on eleven economic sectors:
Land use
Agriculture,
Livestock,
Forestry
Transportation
Construction
Waste Management and Emissions Capture
Manufacturing
Information and Communication Technology (ICT)
Water Supply and Treatment
Electricity, Gas, Steam, and Air Conditioning Supply
Financial and Insurance Activities
Eligibility Criteria:
Each sector has specific eligibility criteria (technical annexes) outlining:
Substantial contribution to at least one of the seven environmental objectives.
No significant harm to any other environmental objective ("do no significant harm" principle).
Compliance with national regulations and standards.
The criteria are based on metrics and thresholds (both quantitative and qualitative), considering international best practices and Panama's specific context.
Land Use Sector:
The projected increase in the frequency of extreme weather events and changes in precipitation and temperature patterns directly impact the land use sector, specifically the quality and volume of production, threatening the region's food security. Accordingly, the Taxonomy applies transversal eligibility criteria to the land use sector (Agriculture, Livestock, and Forestry) to ensure the sustainability of activities across all seven environmental objectives.
"The land use economic sector, which integrates three economic sectors, Livestock, Agriculture and Forestry, is the only sector that the Taxonomy transversally establishes eligibility criteria for economic activities that contribute substantially to the seven environmental objectives included in the Taxonomy."
Adaptation to Climate Change:
Specific eligibility criteria for activities contributing to climate change adaptation are detailed in Chapter 3 of the SFTP. These activities include:
Investments in ecosystem improvement projects in water catchment areas.
Stormwater management.
Nature-based solutions for drought and flood prevention.
Wetland restoration.
Sustainable Urban Drainage Systems (SUDS).
Social Safeguards:
The SFTP acknowledges the importance of social aspects and provides guidance on social safeguards, including:
Elements of corporate governance
Respect for human rights.
Indigenous Peoples and Cultural Heritage.
Future Updates and Expansion:
The Taxonomy is a dynamic and living document and it should be subject to periodic updates. Future revisions may include:
New environmental and social objectives.
Expansion to cover additional sectors and economic activities.
Refinement of existing eligibility criteria based on scientific advancements and evolving national priorities.
By aligning with international best practices and standards, the SFTP facilitates cross-border investments and collaborations. It signals to the global community that Panama is committed to sustainable development and open to partnerships that advance this agenda. This can attract international investors and financial institutions that are seeking opportunities in sustainable markets, further bolstering Panama's economic prospects.
In conclusion, Panama's Sustainable Finance Taxonomy is a crucial tool for catalyzing sustainable investments, fostering transparency, and driving the country's transition toward a more resilient and sustainable future. It not only benefits the environment and society but also strengthens the economy, enhances Panama's international standing, and paves the way for a more prosperous and equitable future for all.
A guide recently released by Latinex offers guidance on best practices for issuing different thematic financial instruments, aligning with international standards and taxonomies such as the SFTP, Climate Bonds Taxonomy, and ICMA principles.
Please reach out to our law firm today to explore how Panama's Sustainable Finance Taxonomy can impact your business initiatives. We are ready to assist with any questions, business ideas, or legal needs you may have in this area.
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