The ESG factor

ESG, nice to have or must have?

Investors across Latin America are increasingly seeing ESG frameworks as central to their investment theses. The region however remains a minefield especially in terms of due diligence complexities when it comes to local partners.

Ratings agencies, including Moody’s and Fitch, have consistently pointed to significant ESG risks when it comes to investing in Latin America. Among the major red flags: climate risk, environmental credit exposure and lacklustre efforts around carbon transition.

A Colombia-based ESG consultant to several leading conglomerates explained, “It’s worth emphasizing that ESG considerations are a priority for any investment in Colombia. Projects can be suspended for not respecting these issues. In addition, the Political Constitution provides different tools for environmental licensing and also tools for citizen participation so that populations surrounding these projects can also anticipate situations and thus prevent, mitigate, compensate and even indemnify against environmental effects.”

“It’s worth emphasizing that ESG considerations are a priority for any investment in Colombia. Projects can be suspended for not respecting these issues.”

ESG consultant, Colombia

Naturally, reputation is not the only thing that matters – so too does profit. What investors want to know is, does ESG investing provide a good return on investment? The ESG consultant believes so, “ESG evaluations help investors anticipate and prevent the development of risks. For example, the impact of strikes, blockades or protests against certain projects, business activities or operations could be reduced or even avoided entirely.” For this reason, ESG investments generate a good return, in the sense that they enable both the environmental viability and the social viability of the projects.

Across Latin America, partly due to the use of social networks, more and more civil society organisations are strengthening their stance against companies that may not be making investments with appropriate levels of due diligence on environmental, social and corporate governance issues. Therefore, ESG investments which are backed by thorough due diligence can mitigate the potential for backlash on the ground and reputational attacks on the web.

“Countries like Uruguay and Chile have been promoting ESG best practice and have strengthened their institutions to support it which gives much-needed confidence to investors. Unlike Brazil, for example, where the environmental issue is definitely not a priority on the current government’s agenda,” adds the ESG consultant.

“Countries like Uruguay and Chile have been promoting ESG best practice and have strengthened their institutions to support it which gives much-needed confidence to investors. Unlike Brazil, for example, where the environmental issue is definitely not a priority on the current government’s agenda.”

ESG consultant, Colombia

Latin America’s ESG challenges are historic and entrenched. The region is blighted by a history of environmental brutality, social inequality and poor corporate governance. ESG investors will be put off deploying capital unless they feel the authorities have the resources – backed by political resolve – to reverse this.

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