Latin America and the Caribbean are at a critical juncture, if they are to redefine their financial model towards a more sustainable one.
The Sustainable Finance Index (SFI) 2024, developed by the Climate Finance Group for Latin America and the Caribbean (GFLAC, in Spanish), provides a detailed overview of the challenges and opportunities facing the region on its path to sustainability.
Despite making international commitments to confront climate change, countries in the region continue to face difficulties in accessing international finance. This includes increases in their external debt, as much of the climate finance they currently access comes in the form of loans. Meanwhile, at the national level, many continue to invest in activities that increase the greenhouse gas emissions that cause climate change, hindering their transition to a more sustainable economic model. However, our report also reveals progress and key areas of opportunity to strengthen sustainable finance in the region.
Sustainable finance falling short in LAC
The SFI 2024 highlights a significant gap between revenues generated by Latin American and Caribbean countries from carbon-intensive activities and those earmarked to combat climate change and protect biodiversity.
Overall, countries in the region receive over 19 times more revenue from fossil fuel export-related activities – a total of USD 233.3 billion in 2023 – than they do in climate and biodiversity finance (USD 11.8 billion). They also allocate 12 times more resources to carbon intensive activities – a total of USD 66.8 billion in 2023 – than they do to initiatives that will help combat climate change and protect biodiversity.
This imbalance reflects the region’s historical dependence on sectors such as mining, oil, coal and gas. But it also represents a key opportunity to redirect financial flows towards sustainability, recognising that the transition to low-carbon economies is not only a matter of climate change mitigation, but also of adaptation, and long-term economic competitiveness.
Top performers: Guatemala leads on sustainable finance
Our index takes into account four variables, including countries’ incomes linked to sustainable activities and carbon intensive revenues, and provides a rating between zero and four for their performance. None of the 20 countries in our analysis – those with the highest greenhouse gas emissions in the region – scored the maximum of four points.
With a score of 2.6 in the sustainable finance index, Guatemala earned the highest ranking of all countries reviewed. This is because it has allocated 35 times more resources to activities that will combat climate change than to carbon-intensive activities, and because it is a country that does not depend on the fossil fuel industry to power its economy. But, like others in the region, it faces challenges in accessing international climate finance.
Other countries such as Honduras (2.5), Jamaica (2.5), El Salvador (2.4) and Panama (2.4) have also made progress, in terms of their public budget allocations in relation to climate change, although they also face challenges in accessing international funding. This limits their capacity to implement climate policies, such as efforts towards their nationally determined contributions (NDCs) as part of the Paris Agreement.
Large economies, big challenges: Brazil and Mexico
Brazil and Mexico, the largest economies in the region, are in a critical position in the context of sustainable finance. According to the SFI 2024, both countries have medium and low scores: Brazil with 2.1 points and Mexico with 1.3 points. These results reflect a disparity between their revenues and expenditures from carbon-intensive activities and the financing associated with addressing climate change.
In 2023, Brazil generated 33 times more revenue from carbon-intensive activities than it brought in from international climate finance sources, and allocated 1.5 times more budget to polluting activities than to sustainability initiatives. Mexico, on the other hand, faces a more complex situation: it generated 57 times more revenue from carbon-intensive activities, while allocating 28 times more resources to polluting sectors than to addressing climate change.
Despite these challenges, both Brazil and Mexico have the opportunity to lead crucial change in the region. Due to their economic weight and political clout, both countries could mobilise significant capital towards sustainable projects, creating a multiplier effect that inspires other nations in the region to follow suit.
To achieve this, it is essential that Brazil and Mexico align their fiscal policies with international climate commitments. This means incentivising the development of renewable energy and improving energy efficiency, while discouraging activities that perpetuate pollutant emissions – a significant challenge, as both continue to heavily support fossil fuel extraction and exploration, including the activities of their state oil companies, Petrobras and Pemex.
Redirecting resources for sustainability
The challenge is clear: at the national level, Latin American and Caribbean countries must accelerate their transition to more sustainable finance. Economic dependence on carbon-intensive activities not only jeopardises the achievement of international climate targets, but also exposes the region to the devastating impacts of climate change, such as natural disasters and forced migration, which are already affecting many communities across the region.
The SFI 2024 underlines the urgency of a radical shift in resource allocation. Currently, most countries in the region allocate less than 1% of their budgets towards projects that will help combat climate change and protect biodiversity. El Salvador is one of the few exceptions, allocating more than 3% of its budget to climate and sustainability initiatives, but many other countries lag behind, limiting their ability to adapt to and mitigate the effects of climate change.
However, the task is not only for the countries of the region. It is vital that at the international level, there are funding commitments, such as the creation of a new collective quantifiable climate finance target at the ongoing COP29 summit in Baku, Azerbaijan. This goal – and making it a reality – will help countries to finance urgent actions, especially focused on adaptation, through public funding in the form of grants, to avoid an incremental increase in countries’ debt levels. This new target to be approved in Baku will be critical to incentivise countries in the region to move towards more sustainable finance.
A call to action
The SFI 2024 sends an urgent message: the countries of Latin America and the Caribbean have a unique opportunity to lead the global transition to sustainability, for which they will need national transformations – but also international support.
To achieve this, they must implement fiscal reforms that promote the use of clean energy, incentivise energy efficiency and discourage polluting activities. In addition, financing countries, financial institutions and development banks must take a leading role in financing sustainable projects, facilitating direct access to capital for those sectors that need it most.
The challenge is to ensure that the region’s economic development is inclusive, resilient and ready to meet the challenges of climate change. Now is the time to act – and the Sustainable Finance Index 2024 provides a clear roadmap on where to start, and how to move towards a fairer and more sustainable future.
