Environmental, Social and Governance (ESG) focused investing has arrived and Latin America has all the ingredients for it to transform the region.
Governance was the first pillar to gain serious traction in Latin America as notorious and wide-spread corruption scandals – Petrobras, Odebrecht, Vale etc – ravaged the confidence of investors who have demanded improvements.
Social unrest has also been growing across much of the region as the people grow tired of the repeated inability of governments to effect positive change.
The founder of a Latin American ESG risk advisory firm sees interest in ESG factors increasing, “The COVID-19 pandemic has also introduced systemic changes to the region such as supply chain disruption, social and racial inequality, political unrest, healthcare and economic failures, further promoting the need for ESG-focussed investment.”
Dominik Rohe, the Head of Latin America at BlackRock agrees, “We are seeing growing interest in sustainable strategies from pension funds across the region, including Mexico, Colombia and Peru. We believe increased awareness about sustainability among consumers and investors will continue to drive change in the region’s economy and financial markets.”
There is widespread acknowledgement that the potential for sustainable and impact investment strategies is high in Latin America. However, there are also significant barriers, as a Lima based impact investor outlines, “One challenge is the difficulty in measuring impact. Most companies just see it as a cost with no tangible benefits but we compare it to financial audits, it is a positive externality that will benefit your business in the future. Agricultural companies are already adopting the idea because organic and fair trade certifications allow them to access customers who pay more, there is a tangible incentive.”
“One challenge is the difficulty in measuring impact. Most companies just see it as a cost with no tangible benefits.”
Impact investor, Peru
A risk consultant sees these challenges as teething issues in a trend that is still maturing, “ESG is here to stay. There are two main considerations, firstly how enlightened and responsible leadership and the board are on these issues, or how superficial, greewashy or downright irresponsible they are; and secondly how committed, proactive or outright activist the key stakeholders are – especially investors but also communities, customers, NGOs, partners, regulators and employees.”
“There is growing interest in sustainable strategies from pension funds across the region.”
Asset manager, Mexico
For investors, assets they select must align with the value of their fund and clients. This is no longer limited to excluding weapons and tobacco, clients are expecting best practice. A Mexican asset manager told us, “Pension funds have historically been first movers in incorporating investment best practice and there is growing interest in sustainable strategies from pension funds across the region.”