Dominican Republic launches its Green Taxonomy

The Dominican Republic Green Taxonomy (TVRD) is a classification system of economic activities and assets that contribute substantially to the achievement of environmental and/or social objectives, aligned with the commitments, strategies and policies outlined by the country. Thus, the first TVRD acts as a reference framework that seeks to promote initiatives that support both sustainable development and the transition to a low-carbon economy.

This achievement is also a valuable experience for other countries trying to advance along the same path. For this reason, Green Finance LAC spoke with Olga María Nivar, Director of Public Offerings at the Superintendencia del Mercado de Valores (SIMV) of the Dominican Republic, after a webinar held by the LAC Observatory of Sustainable Finance Taxonomies.

1. Considering its approach to align the TVRD with national commitments, strategies and policies on environmental issues, while deeply participatory, adapted to national circumstances, how long did the development process take in its different phases?

The taxonomy work began in 2020 with the signature of a Memorandum of Understanding (MOU) between the International Finance Corporation (IFC) of the World Bank Group and the Superintendencia del Mercado de Valores where the action plan to address the taxonomy development project was worked out. Additionally, an arduous work was done to raise awareness with the main stakeholders (entities involved or associated with the process) in the development of a coherent way to define and treat sustainable finance, such as green bonds in this market, the importance of seeking a more sustainable financial system and the reason for a taxonomy for the Dominican Republic. This awareness-raising work was done with both the public and private sectors, which was key and essential for them to support and be part of the construction of our Taxonomy.

2. What were the factors that led SIMV to lead the development of the TVRD? How will this leadership influence the implementation of the taxonomy?

At the beginning of 2020, the SIMV published the guidelines for the issuance of green, social and sustainable securities in accordance with international principles and standards on the subject. However, we realized that the guidelines were not enough, since we are not experts or specialists in the field. We needed to ensure a transparent securities market and give our investors credibility that these investments are considered green and that they have positive environmental objectives and avoid greenwashing, so we saw the need to develop a green taxonomy to support not only the issuers in our market but also the entire financial system.

Furthermore, from the SIMV we are committed to seek financial instruments that pursue a more sustainable financial system, being sustainability an essential part of our strategic plan and our roadmap for the coming years.

3. How were the priorities defined for the inclusion of the sectors and economic activities prioritized in the Taxonomy? What was the methodology used?

The methodology began with a strategic planning stage that established the foundations and processes necessary for its construction. The next step was the definition of clear general and specific environmental and social objectives. This step was crucial to establish a solid foundation that would guide the entire development process. The process involved harmonization with global frameworks to ensure international relevance and applicability, a sectoral analysis to identify key sectors and economic activities, and the establishment of substantial contribution criteria with the participation of sectoral experts. The collaboration of sectoral experts was crucial in the process, as well as public consultations that enriched and refined the content of the taxonomy with the inclusion of diverse inputs to refine and validate the taxonomy.

The TVRD development process started with the definition of climate and environmental objectives; once these objectives were defined, the economic sectors with the greatest environmental and economic impact for the country were selected. Subsequently, economic activities were identified to contribute to the achievement of the country’s commitments; and then, the technical criteria of substantial contribution of the economic activities were developed, allowing to assess the economic activities and determine if they are sustainable or not.

The definition and selection of sectors and economic activities to be addressed within the TVRD was based on a process of identification and evaluation, guided by the environmental objectives initially established. This process involved an analysis of the economic sectors based on their contribution to greenhouse gas (GHG) emissions, as reported in the National Greenhouse Gas Inventory, their impact on the country’s Gross Domestic Product (GDP), the economic structure defined in the National Classification of Economic Activities 2019 (CNAE-2019), and the investment required to meet the commitments established in the country’s Nationally Determined Contributions (NDCs).

For the selection and prioritization of key sectors, sectoral evaluation methodologies were adopted, applying three complementary approaches to ensure a comprehensive and balanced analysis:

1. RELATIVE WEIGHTS METHODOLOGY. This quantitative approach assigns a specific weight and scale to each relevant criterion, making it possible to multiply the scores obtained for each sector and establish a prioritization ranking.

2. ELECTRE METHODOLOGY. This multi-criteria decision method evaluates the advantages and disadvantages of each sector against the established criteria, facilitating the ranking of alternatives according to an order of preference based on the direct comparison of options.

3. DECISION MATRIX METHODOLOGY. Defines weights for the different criteria evaluated and adds these values for each sector, establishing a ranking based on the aggregation of scores.

Through these methods, the relevant data for the selection of economic sectors were analyzed, including their relationship with climate objectives and their potential contribution to environmental sustainability. As a result of this multi-criteria analysis, sectors associated with water and water resources, waste management and emissions capture, transportation, energy, construction and industry were identified as the most relevant sectors for the taxonomy. In addition, crucial enabling sectors were identified, such as information and communication technologies (ICT), due to their fundamental role in supporting and promoting sustainable practices across different economic activities.

This analysis and selection process ensure that the TVRD focuses on those economic sectors and activities that not only have a high potential for climate change mitigation and adaptation, but are also of strategic importance for the sustainable economic development of the country.

The definition of substantial contribution criteria for activities within the TVRD represents one of the fundamental pillars of the development process to determine which economic activities and assets are considered sustainable and effectively contribute to the country’s environmental and climate objectives.

The substantial contribution criteria were established with an approach that balances technical rigor with practical flexibility, recognizing the diversity and specificity of each sector and economic activity. Some activities are recognized as inherently sustainable and directly eligible for their direct contribution to environmental objectives. However, most activities require the fulfillment of specific criteria, either quantitative or qualitative, to be considered eligible.

For the definition of these criteria, specific indicators and thresholds were used, designed to measure the contribution of each activity to the sustainability objectives. These parameters include, among others, GHG emission reductions, energy efficiency, sustainable resource use and climate change adaptation measures. The adoption of these indicators and thresholds was based on a detailed analysis of international references and consultation with sectoral experts and relevant stakeholders.

In addition, specific complementary measures for certain sectors and activities are recognized and valued, which, although not directly part of the substantial contribution criteria, facilitate compliance. This includes professional services, studies, and technical innovations that bring additional benefits to the sustainability of assets or economic activities. Investments in intangible assets such as innovation, R&D, which play a crucial role in moving towards sustainability and green transition, are also considered eligible.

As a next step, a series of technical discussion tables were organized for financial authorities, academia, public institutions, industry associations of the Dominican Republic, private companies, among other stakeholders, where the guiding principles and structural elements that would constitute the TVRD were presented. These meetings were held with the purpose of providing a space for technical discussion to hold conversations on the Taxonomy of the country.

4. How was the process to adapt the TVRD to national circumstances while seeking interoperability with regional and international taxonomies?

In its development, efforts were made to consider the critical need for interoperability and harmonization with the Common Framework for Latin America and the Caribbean, other regional taxonomies, such as Colombia’s taxonomy, the taxonomy developed by the Central American Council of Superintendents of Banks, Insurance and Other Financial Institutions (CCSBO), and global taxonomies, such as the European Union’s. This approach ensures consistency with international standards, facilitating integration and global recognition of the country’s sustainable finance initiatives. The adoption of principles and criteria aligned with international frameworks improves comparability across jurisdictions and promotes the flow of cross-border investment into sustainable projects.
Nevertheless, not only adopting what is already developed, but also adapting it to the reality, regulations and existing commitments in the Dominican Republic.

In this regard, how was the development of the technical criteria for the environmental objective: management of water and marine resources (a novel approach given the country’s coastal context)?

Addressing the environmental objective of water and marine resources management is the result of the multi-criteria analysis developed for the selection of sectors, where the most relevant sectors for the taxonomy were determined to be those associated with water and water resources, among others. The ‘Sustainable use and protection of water and coastal-marine resources’ sector was highlighted as one of the most important due to its strategic relevance in the management of water stress and the preservation of aquatic biodiversity, essential for food security and climate resilience in the Dominican Republic.

5. What are the main challenges foreseen in the implementation of the taxonomy? What capacities will need to be developed and strengthened to ensure implementation?

One of the challenges is that the Green Taxonomy has been developed by the Ministry of the Environment and Natural Resources and the SIMV; therefore, it is necessary that the other supervisory agencies of the financial system issue regulations linking its use.

On our part, we have a roadmap to address and continue working on training on how to use the taxonomy, establish technical meetings with potential issuers, investment funds and other users of the taxonomy to make it known. Additionally, the SIMV has a strategic plan that will allow us to continue promoting and launching new guidelines for our market that, with the support of the taxonomy, promote the issuance of sustainable financial instruments.

Additionally, we are planning, together with our strategic partners at the IFC, to carry out pilots. We know that pilots are currently being carried out with financial intermediation entities, but we want to implement other pilots with investment fund management companies for the funds they manage that can disclose on the alignment of their investments to the taxonomy. Also, with the construction sector would be another pilot contemplated to be implemented.

6. How will SIMV ensure transparency in the taxonomy implementation process and how will the success of the taxonomy be measured in practice?

We will be implementing transparency, making sure that it is understood how the taxonomy can be used and how to apply it. In addition, we will be measuring it from our sector with the issuance of securities in the sustainability-related market.

7. What are three key recommendations you could make to the countries in the region regarding the process of building and implementing their taxonomies?

It is very important to have an oversight and governance committee with the participation of key public sector entities for project implementation. It is crucial to involve and raise awareness of its importance to all sectors, from the financial system, the real sector, associations and unions, specialists, as well as universities to make known what it consists of and why it is necessary to have a green taxonomy. Always be accompanied by a specialized strategic partner with experience in the development of a taxonomy that allows the process to be more efficient and enriching for all involved.

In addition to the above that covers the construction process, it is very important for its implementation the constant training on how to use it and the pilots that allow to put it into practice by the potential users.