What are companies in Chile and the rest of Latin America doing to comply with the Paris Agreement?
There have been some important steps by some in terms of incorporating renewables in their energy mix, resort to solar energy for desalination, use electric fleets, and commit to adopting circular economy processes. A large water utility has issued green bonds and others are looking into following suit, but very few have committed to concrete action plans, with targets and deadlines, to transition to carbon neutrality. Latin American companies have a long way to go, not only in terms of pledging to reduce emissions or working on adaptation projects, but more broadly in incorporating environmental, social and governance issues into their risk-assessment processes and value-creation strategies.
Investors and activists are having an impact in the U.S. and elsewhere to get companies to consider their ESG impacts; where is Latin America in this process?
ESG hasn’t gone mainstream in Latin America. Of the 100 companies listed in the IADB’s IndexAmericas, a corporate sustainability index that assesses companies in Latin America on their ESG performance, only 16 have their headquarters in the region; the others are multinationals from the U.S. and Europe that operate here.
Most Latin American companies are controlled by one or two large shareholders, with pension funds and other institutional investors relegated to a minority position, with the right to name one to three members in the boards of companies in which they invest. With the exception of Brazil, whose National Monetary Council published a norm that requires pension funds’ asset managers to consider ESG risks as part of their investment decision-making process, local investors are not required to ponder ESG risks when investing in a Latin American company.
What role are banks playing in this process?
Some banks active in Latin America have earmarked potential green loans for corporate borrowers, but to date, just two companies have raised green loans in the region.
How would you characterize disclosure of ESG risks in the region?
ESG disclosure is voluntary. The regulator requires that publicly traded companies list the risks they face in their annual report, but most focus on those related to financial, regulatory or market topics.
I just read the risk section of a major retailer that operates in Chile and Peru: Besides describing their corporate social responsibility activities—donations, social campaigns and support to the development of small- to medium-sized businesses—it doesn’t include information on any aspect of ESG risks, including, for example, the impact that changing weather patterns has for their apparel business, or...the human rights status of the factories that manufacture the clothes they sell.
There are only a handful Latin American companies that disclose information about the potential impact of the increasingly severe weather events in their operations and supply chains, their safety records, history of labor conflicts, and/or the list of regulatory fines they have had to pay for violating environmental or social laws. In addition, even less disclose the potential impact an aging population, changes in consumer preferences, or technological obsolescence can have for them.
Why should companies care more about ESG? How can they measure effectiveness?
ESG's key performance indicators are as relevant as traditional financial and accounting metrics when evaluating a company's performance. They contribute to measure, manage and communicate information that helps assess the risk profile, management quality, corporate culture, leadership, and other aspects that have a direct impact on the bottom line.
And they have consequences in terms of access to financing, productivity, brand value, license to operate, and talent retention and recruitment. If not addressed properly, bad performance in ESG matters can lead to fines, lawsuits, credit downgrades, legal and regulatory changes.
Are you hopeful more companies will embrace ESG?
Six Brazilian organizations already have adhered to the recommendations of the Task Force on Climate-Related Financial Disclosures, including Electrobras, Itau, Ekatu and the Brazilian Federation of Banks. That’s a good start, but we need hundreds more to follow. Others companies are starting to voluntarily use the Committee of the Sponsoring Organizations of the Treadway Commission’s model to assess and disclose their risks, which is also positive.
Many firms that measure ESG through rankings or individual company evaluations are starting to promote their services among Latin American companies. In the case of Chile, the Columbia University Global Center in Santiago has teamed with Columbia Law School’s Millstein Center for Global Markets and Corporate Ownership to offer a series of seminars on ESG.
However, I think regulators will need to play a role if we want to achieve progress.