Strategic intelligence in Latin America

Better borrowing

Investors and lenders ponder ESG measures but reporting remains a challenge.

Impact, sustainable development goals, stakeholder capitalism, Environmental, Social, and Corporate Governance (ESG) are now commonplace in the lexicon of institutional investors and governments alike.

The growing prevalence of climate-related disasters and the COVID-19 pandemic have further sharpened attention on the need for sustainable development. Many countries in Latin America are now looking to fund their needs for climate adaptation and economic recovery with debt, and investor appetite is strong.

In September 2020, Mexico became the first country in the world to issue a Sovereign Sustainable Development Goal (SDG) Bond of approximately USD 50 million. Bolivia is now seeking to follow suit and the United Nations Development Programme is helping with the structuring. While not specifically linked to the Sustainable Development Goals, Chile has placed green bonds totalling USD 6 billion.

A Peru based asset manager sees great potential for ESG-based investing in Latin America to make a real difference, “Governance was the first element to prioritised by investors and governments in Latin America in the wake of wide-reaching corruption scandals. Environmental concerns are now increasingly being addressed with reference in particular to deforestation, the energy transition and the climate crisis. Finally, the pandemic has highlighted inadequacies in many countries’ education and healthcare services and has made the call for socially conscious investment even louder.”

In terms of bank financing, we are starting to see instruments that have pricing or incentives linked to ESG compliance, performance or improvements as validated by an external expert agent. Santander has led the local and regional market in recent years, participating in almost all pioneering green financing initiatives in Latin America, such as the first issuance of a green bond in Chile (by CMPC), Brazil and Argentina, as well as the first ESG loan in Chile (to Acciona) and Mexico.

Latin America has plenty of opportunities for institutional investors to allocate capital to ESG-linked investments but there are two significant challenges: firstly, the reliability of the impact measurement as sustainability regulation is not yet defined and secondly, the willingness of companies and shareholders to incorporate ESG standards given the cost they represent.

The Peruvian asset manager admits, “Monitoring is a challenge, most companies still see it as a cost rather than a tangible benefit. It is important in some sectors though, for example having organic and fair trade certifications allows agricultural companies to access customers who pay more. Fast-moving consumer goods are also looking to boost their brand equity by being certified as B-Corps: a company externally assessed to have a positive impact on its workers, community, environment and customers.”

“Monitoring is a challenge, most companies still see it as a cost rather than a tangible benefit.”

Asset manager, Peru

The problem is that most sustainability measurement is self-reporting, as an investor in Latin America agriculture comments, “Yes, organic and fair trade certifications are helpful but there is still work to do as most of ESG is self-reporting. In agribusiness, one problem is the level of informal workers and underpaid suppliers. There are certifiers for that but there are still problems of veracity, it is hard to control everything.”

“Any way you look at it, ESG has arrived globally—especially in the investor community—and cannot be ignored locally or regionally by any company.”

CEO, risk advisory firm, Latin America

The CEO of a risk advisory firm operating across Latin America gave us a general view from his client-base, “Latin America, like anywhere else, has companies that care about ESG issues and others that don’t. It’s important to understand what lens you are looking at ESG through: are you an investor or asset manager, or are you the company’s board and c-suite overseeing and implementing an ESG strategy? Any way you look at it, ESG has arrived globally—especially in the investor community—and cannot be ignored locally or regionally by any company.”

We fully expect that this awareness among investors and governments will drive a change in the region’s economy and financial markets, as we see more companies adopting best practices on sustainability and more investors and governments signing up to global standards and initiatives.

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