2020 and the first half of 2021 cannot be indicative of long-term trends – this is an exceptional situation due to the global pandemic. Before Covid-19, however, Latin America (LATAM) was arguably a favoured jurisdiction for foreign direct investment (FDI). In 2018 the FDI in Latin America grew 13.2% to US$184,287 million dollars, in 2019 to $160,721 million), it’s evident that investment in the continent has been reduced in recent months. Reduced, but not eradicated altogether.
Like most of the world, FDI of multilatina companies abroad had a few years of growth then fell during the pandemic (with the exception of Brazil). But, LATAM’s fall in FDI was below the global average, as demonstrated by a study conducted by the General Secretariat Iberoamericana and the Institute of Foreign Trade of Spain (ICEX Invest in Spain), Global LATAM 2020.
The further development of relationships between countries, the increasingly interconnected and globalised business climate, and the majority presence of multilatina companies operating outside the continent (and with a presence in stock and business indicators), makes ESG criteria more and more prevalent in the day-to-day management of organisations. It impacts both foreign companies operating in the region and multi-LATAM companies that are leaving the traditional borders of LATAM.
The renewable energy sector’s one of the spearheads for sustainable investment in Latin America. The Americas has geographic and meteorological characteristics that give it the power to become a leading player in the field of renewable energy. According to Ashurst’s Powering Change: Energy in Transition study, 83% of LATAM executives surveyed said they’d changed their investment strategy for energy transition over the past 12 months, and they hope to continue doing so. In addition, since 2017 sustainable financing has become increasingly important in Latin American countries, with instruments such as sustainability-linked bonds and loans (SLB and SLL) rising in popularity.
Further, concrete initiatives are emerging, promoted by private organisations. For example, Bancolombia presented its sustainable collective investment fund in February 2020, clearly stating they seek to invest in companies that: contribute to society, protect the environment, generate economic value, have good corporate governance practices, develop initiatives that contribute to responsible use of natural resources, practice inclusion, support education and talent retention, and enforce gender equity. And this isn’t limited to the financial sector. LATAM Airlines recently presented its sustainability strategy for 2050, which includes investments worth US$6 million in the first six years.
As detailed in Global LATAM 2020, Latin American companies, especially multilatinas, attach importance to the ESG criteria, both at the management or strategy level and with regard to reporting. According to data from the Global Reporting Initiative (GRI), 864 companies in Latin America published sustainability reports during 2017 –above the global average. These companies also enjoy an increasing presence in sustainability rankings, such as the Corporate Knights Top 100, and are betting on investment in innovation as a lever of change and driver of ESG implementation.
In recent years, different indices or initiatives have emerged that seek to measure and ensure sustainable development, and monitor and encourage development of ESG criteria in Latin America. Examples include: IndexAmericas, the index created by the Inter-American Development Bank that seeks to recognise the 100 most sustainable, publicly traded companies operating in Latin America and the Caribbean; the Sustainable Finance Index prepared by the Climate Finance Group for Latin America and the Caribbean; and the Responsible Investment Study in Latin America, published by the United Nations PRI initiative.
With regard to disclosure and reporting, the majority trend at the international level is that reporting on the presence of ESG criteria has a greater impact, both at the level of economic return received and clear impact on the planet and society. At the legislative level, there’s no single criteria for companies or funds to report on the application of ESG, however the EU has enacted legislation that any company or fund marketing in Europe must have ESG reporting on their website.
In Argentina, ESG reporting isn’t mandatory, although BYMA (Argentine Stock Exchanges and Markets) monitors the performance of the companies listed in its Sustainability Index. In Mexico, ESG disclosure is also not mandatory, although the Mexican Stock Exchange (BMV) and the Institutional Stock Exchange (BIVA) have informative projects on ESG criteria.
What are the implications of this trend for investors in LATAM? The Americas are full of opportunities, but also complexities, cultural particularities, and compliance specificities. The greater the presence of ESG criteria, the greater the need for specific local knowledge, internal controls, analytical tools, and a multi-country strategy that includes all the opportunities and risks of operating in several American countries.
There’s a growing debate about ESG criteria and its implementation in Latin America in response to the continent’s social reality. Some of the sectors that can most easily and best exploit ESG are the primary sector (especially agriculture), renewable energy, infrastructure, education, start-ups or Fintech – and these are, in turn, some of the most attractive and fast-growing opportunities in the Americas.
Add to this the growing strength of the urban middle class and the emergence of young activists with presence, we find the ideal breeding ground for ESG to be increasingly present and demanded by all different sectors of society.
If we talk about a fund or international corporation investing in Latin America, or a multilatina company expanding within the region or into Europe or the US, we see that the presence of ESG criteria in daily management and reporting is now required and expected.
A talk with Margarita Oliva, Regional Head of Banking and Finance – Latin America DLA Piper
In our most recent webinar “Renewable energy opportunities in LATAM & Europe”, we chatted with Margarita Oliva, Regional Head of Banking and Finance – Latin America at DLA Piper, about the impact of ESG criteria in LATAM, particularly in the banking industry.
Auxadi: Which part of ESG (Environmental, Social, or Governance) is most important for Latin-American companies?
Margarita Oliva: Environmental has been a big area of focus for many countries and already in many projects, not only on the renewables sector but any infrastructure or other energy sector projects. Some countries have been more restrictive than others in the sense of putting more emphasis on environmental regulations and environmental permits, but I would say that overall, it’s now a playing field for everyone. All governments are aware that this is important for them, for their communities.
A: And the social side?
MO: The social aspect of ESG has also been increasingly important over the years. There have been very specific and well-known cases of communities opposing several renewable projects in Mexico over the years and this has had a big impact on the sector. There were some sponsors who had to move on and give up their projects. So, I see communities and the social part of ESG being more and more important – and of course, governance as well. As we all know, in the last years before the pandemic, some LATAM countries, like Brazil, have lived through a complete restructuring of governance principles for many, many companies.
A: In your opinion, as an expert in banking and finance, what do you think is the impact of ESG criteria in financing?
MO: ESG is very, very important these days in anything you do in LATAM, particularly if you want to finance it. The multi-lateral banks have been very prominent in the ESG environment but now everyone is the same – from the commercial banks to the multi-laterals to the ECAs. Everyone is very interested in making sure that any money they lend into a project is taken care of from the point of view of how it will be invested and how you take care of the environment and the social, governance aspect of it. I think ESG has become increasingly important over the years. It’s here to stay and more and more we see that the banks are very strict about it.
The trend is clear: ESG is in Latin America to stay. Investors should be ready.
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“I think ESG has become increasingly important over the years. It’s here to stay and more and more we see that the banks are very strict about it. The trend is clear: ESG is in Latin America to stay. Investors should be ready”
Margarita Oliva
Regional Head of Banking and Finance – América Latina DLA Piper
Local Knowledge – International Coverage
Founded in 1979, Auxadi is a family-owned business working for multinational corporations, private equity funds and real estate funds. It’s the leading firm in international accounting, tax compliance and payroll services management connecting Europe and the Americas with the rest of the world, offering services in 50 countries. Its client list includes many of the top 100 PERE companies. Headquartered in Madrid, with offices in US and further 22 international subsidiaries, Auxadi serves 1,500+ SPVs across 50 jurisdictions.
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