ESG has become mainstream in recent years. Most of our clients now have some form of dedicated ESG resource that is responsible for the development of ESG policies and strategies and is accountable to the board.
In practical terms, many of these institutional investors and corporates have been using strategic intelligence companies, such as ours, to monitor ESG risks for decades. But now it has a name!
Briefly, strategic intelligence firms aggregate huge volumes of local intelligence from trusted, proven and knowledgeable human sources and experts and cross reference this against open data sources to independently build an accurate picture of reality for their clients. This approach is particularly useful to assess issues that are qualitative rather than quantitative in nature, like many ESG concerns.
This kind of work has been an essential component of success for anyone looking to conduct international business in general and for those with interests in Latin America in particular. The region is awash with opportunity for foreign investors but the financial and reputational risks associated with misunderstanding environmental, social and governance issues are severe.
As such, evaluating the quality of governance in Latin American businesses has been a key pillar of our business since inception. As an example, consider the prevalence of family-controlled businesses across Latin America. How can any responsible investor take a meaningful position in such a business without understanding, independently and in detail, the company’s reputation for integrity, probity and governance?
We also have considerable experience investigating the social impact of businesses. Again, understanding social and community issues is an important aspect of doing business in Latin America, across many sectors. For example, consider the board of a global mining company with a social or labour issue in Latin America, do they rely solely on their own internal reporting to assess these risks? No, they don’t. Well, some do, but they shouldn’t. Independent analysis and monitoring is critical for a board that sits several thousand miles from a rapidly evolving situation and only has a potentially conflicted source of information for their local team.
Finally, we have environmental issues. This is one area where we have seen a huge leap in interest over the past three years. Institutional investors and corporates are increasingly aligning their strategies to global commitments such as the Paris Agreement and consequently greenwash is no longer good enough. Imagine you are a European bank that is financing an oil pipeline in a Latin American country when the pipeline bursts and pollutes a river that sustains local communities and ecosystems. It is not just the operating company that will be scrutinised, sources of financing are being tracked and exposed by NGOs and the media for failing to ensure adequate ESG policies and procedures while being PRI or Paris signatories.
Strategic intelligence firms aren’t the only ones seeking to address these issues but we believe they are uniquely experienced and well-placed to help. We would say that, of course, but there are good reasons. As we have discussed in other articles in this issue, successful ESG strategies have two main hurdles: measurement and transparency.
Measurement will always be an inherent challenge as many ESG issues are not black-and-white, they exist in shades of grey. Furthermore, no two companies will report in the same way with comparable data. For example, Microsoft’s 2020 Sustainability Report is 100 pages long but other companies have just a few paragraphs in their annual report. In our view, this renders most dashboards and algorithms useless: rubbish in, rubbish out.
Transparency is also a problem as most ESG metrics are self-selected and self-reported. Talk about marking your own homework!
A better approach may be something more akin to academic peer review, where a company’s ESG performance is reviewed independently and confidentially by a group of their key stakeholders and industry peers. This is exactly how strategic intelligence firms have been operating for decades.