ESG isn’t easy

Socially conscious investing in Latin America is hard to implement.

Latin America should in theory be one of the most attractive regions in the world when it comes to sustainable investing. The protection of delicate ecological environments of global importance, safeguarding indigenous communities, ensuring the sustainable extraction of raw materials critical to global manufacturing supply chains are but a few of the rewards on offer to would-be investors keen to trumpet their ESG credentials.  

Certainly, countries across the region have seized the opportunity to attract such investment. This is especially the case in Brazil which has pursued an innovative approach to courting environmentally conscious investors. Sustainable bonds have been a key policy focus for the government and in December 2020, Banco do Desenvolvimento de Minas became Brazil’s first development bank to issue the bonds. 

An increasing focus on ESG standards will also force industries, where supply chains have historically been exposed to corruption and malpractice, to adapt to minimum requirements. Sectors for which this will be particularly important include mining and meat production. The overtures of the administration of President Jair Bolsonaro is also motivated by politics – the country faces an election later this year and the Government will be keen to portray itself as environmentally conscious given severe domestic and international criticism of its environmental policies which will be a key issue during the election.    

But how do we measure success in this area? We spoke to an impact investment professional based in neighbouring Peru who puts the challenge of measurement into perspective, “In the case of larger companies, at the level of investment and public statements, it is easier to make measurements and some companies make their own reports.” 

However, it is more bureaucratic and resource-intensive affair for smaller companies. The investment professional elaborated, “For smaller, private companies ESG is more difficult, investors have some channels, for example one that is becoming more widespread, are the B courses, a certification that companies have an objective commitment within the DNA of the company, and they measure performance in terms of improving social status. The B course includes visits, evaluations, etc.” 

“Before, social risk was not monitored, people thought it was distracting as it meant less time for running the actual business.”

Impact investment professional, Peru

He continued, “Before, social risk was not monitored, people thought it was distracting as it meant less time for running the actual business.” However, as social impact has risen up the risk register this attitude is starting to change, “We now have the processes and tools to be able to monitor everything and take into account all types of risk. Before, social problems were not so important and were hard to measure.” 

“We now have the processes and tools to be able to monitor everything and take into account all types of risk.”

Impact investment professional, Peru

An ethical banking CFO remarked, “One of our objectives is also to change the financial industry. Five years ago, talking about ethical banking was a provocative concept for banks but today banks in Latin America are trying to change, financing B corps, developing green funds, etc. The industry has already been transformed. On the one hand we will have more competition but on the other it is also positive as we wanted to move the needle.”  

Ultimately, measuring the impact of ESG-conscious investments remains challenging and the requirements remain vague – regulatory changes, issuance of bonds, businesses developing green funds all count but there remains no single comprehensive metric to measure the overall impact of the green investing trend.    

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