Colombia: Leading the Path to Sustainability in Latin America

Colombia has been one of the top economic performers in Latin America and emerging markets, rapidly bouncing back after the pandemic, and achieving 10.7 percent GDP growth in 2021 and 8.5 percent in the first quarter of 2022. However, as one of the 12 countries cataloged worldwide as megadiverse and home to nearly 10 percent of the world’s known species, Colombia is aware that it needs to balance economic growth with environmental conservation. Climate change is a major issue. The country is increasingly vulnerable to flooding, landslides, and water shortages which impact agriculture, human health, economic activities, and critical infrastructure.

In December 2020, Colombia released its revised Nationally Determined Contributions (NDC) to the United Nations Framework Convention on Climate Change, pledging to reduce greenhouse gas emissions by 51 percent in 2030 (compared to the baseline scenario) and working towards achieving carbon neutrality by 2050. Subsequently, Colombia has taken several important steps to transform its intentions into action.

A Local Green Bond Market to Finance Green Projects

The government fostered the development of a local green bond market as a public funding tool to meet the country’s environmental, climate and sustainability targets.

After establishing a green bond framework compliant with the International Capital Market Association’s Green Bond Principles, Colombia proceeded in September and October 2021 to issue its inaugural sovereign green bonds in the local market for an amount of COP 1.5 trillion, and a maturity of 10 years. It was the first green emerging market sovereign bond issued through auction in local currency, following the German twin bond structure.

The transactions yielded positive results in terms of demand, cost, and diversification of the investor base. The two auctions averaged bid-to-cover ratios of 3.0 times. The authorities highlighted a greenium at issuance that doubled from 7bps in the first to 15bps in the second auction. The transactions also achieved a balanced split between foreign (60 percent) and local (40 percent) investors. The inaugural issuance was awarded the Sovereign Green Bond of the Year by Environmental Finance in 2022.

A Green Taxonomy to Pave the Way for Financial Markets

In April 2022, Colombia became the first country in the Western Hemisphere to adopt a national green taxonomy. A green taxonomy is a classification tool that allows lenders and borrowers to identify economic activities that contribute to specific environmental targets. The taxonomy will be used to issue green bonds and will play a key role in channeling private sector capital towards its environmental priorities.

Call for Sustainability in Infrastructure Projects

The government has been cognizant of the importance of developing key infrastructure while managing environmental and social risks. Since 2012, it has been pursuing the development of infrastructure through concession projects involving public-private partnerships (PPPs). In November 2021, the government published the Guidelines for the Development of Sustainable Transport Infrastructure Projects for the Fifth Generation of Concessions (CONPES 4060 of 2021). The Guidelines integrate Environmental, Social and Governance (ESG) criteria in the structuring, financing, operation, and monitoring of projects. The Fifth Generation Concessions program is set to implement 14 projects with an investment of COP 21.8 billion, encompassing rail, river, and airport projects.

ESG Integration for the Financial Sector

In the same vein, the Financial Superintendence of Colombia (SFC) has issued requirements for integrating ESG and climate risks in the investment policy and governance arrangements of pension funds and insurance companies. It has also increased disclosure requirements for funds with ESG, sustainability and/or green claims, set ESG and climate risk reporting requirements for listed companies and published supervisory expectations on climate risk management for banks.  

The World Bank Supported Colombia in Every Step of the Way

The World Bank Treasury's Sustainable Finance Advisory provided technical assistance to the Ministry of Finance and Public Credit, in coordination with the Inter-American Development Bank, to facilitate the structuring and issuance of the sovereign green bond.

The World Bank and IFC together supported the development of Colombia’s national green taxonomy. They worked with the Financial Superintendence and the Ministry of Finance and Public Credit to ensure that the taxonomy was adapted to the local context while following the highest international environmental sustainability standards such as the European Union's Green Taxonomy and the International Capital Markets Association's Green Bond Principles. In particular, the World Bank helped develop the criteria for the land-use sector, comprising forestry, agriculture, and livestock, which is responsible for 59 percent of greenhouse gas emissions in Colombia.

“Due to the predominance of small farms in Colombia, the taxonomy classifies land-use improvements in three levels of complexity and cost: basic, intermediate, and advanced. This allows farms of all sizes to introduce improvements according to their circumstances,” said Farah Imrana Hussain, who led the sovereign green bond and green taxonomy initiatives. The taxonomy considers Colombia’s socioeconomic context and the associated environmental challenges and targets (water and soil management, climate mitigation and adaptation, protecting biodiversity and ecosystem services) that have been incorporated into its environmental policy and regulatory system.

For each sector, the taxonomy’s eligibility criteria consist of the minimum legal requirements locally applicable, “do no significant harm” measures to protect natural resources and a set of sustainable practices and technologies that have been tried, tested and deemed feasible in Colombia. Roundtables were organized across ministries with Colombian technical experts in forestry, agriculture, and livestock industries. World Bank agribusiness specialists and environmental and climate change specialists contributed to the development of the criteria. 

Separately, the World Bank created a National Diagnostic on ESG criteria implementation and is working with the Ministry of Finance and Public Credit to prepare a methodology to integrate ESG considerations into guidelines for PPP projects. The Methodology takes every phase of the project cycle into account — from structuring to financing, operation, monitoring and risk evaluation. The ESG methodology is in line with the World Bank’s Environmental and Social Framework and the IFC Sustainability Standards.

Colombia built a strong foundation for sustainable financing

Having made impressive strides in creating an enabling regulatory environment for sustainable financing, Colombia built a strong foundation to achieve its ambitious climate and biodiversity conservation goals as well as manage the financial sector’s exposure to ESG risks.

“We look forward to continuing our partnership with Colombia as it takes multi-pronged actions to foster inclusive and environmentally sustainable economic growth,” said Peter Siegenthaler.