ESG Investing in Latin America: The Story So Far

In the midst of uncertainties caused by the COVID-19 pandemic, it has been possible to observe the expansion of sustainable investing, especially in Latin America. Over the past two years, investors have been seeing ESG (Environmental, Social and Governance) investing not only as an ethical endeavor, but also as a profitable investment option. Moreover, ESG investing has also shown to be a way of reducing the adverse risk, since sustainable investing usually intersects with stronger corporate governance structures.

But what exactly is ESG investing? ESG it is a generic term that can be used for different types of sustainable investments that aim to create positive and long-term returns for society. It is a non-financial indicator, which includes the analysis of a company’s strategy regarding its environmental risks (i.e., impact on water, ecosystems and human health), protection of human rights and also governance matters such as anticorruption, increased diversity and information transparency. ESG criteria is being used by responsible investors in their decision-making process in order to make a profitable and safe investment, leaving a positive impact on the world.

As a natural response to investors’ increasing demand for a sustainable and social investment, Latin American companies have been working on improving their ESG standards and credit rating agencies have been focusing on ESG criteria when assessing companies’ creditworthiness. The strengthening of ESG criteria is also a key concern for stakeholders, especially considering the positive impact engaging in environmental and social strategies can have on a company’s image.

Besides private initiatives, ESG investing has also been an instrument for governments to address social and environmental matters and the consequences of the COVID-19 pandemic. For example, in January 2021, Chile raised a total of US$4.25 billion in the Euro and U.S. Dollar markets, with a significant portion of the issuance comprised of sustainability bonds. The offering formed part of Chile’s US$19 billion financing plan for the 2021 calendar year. According to Bloomberg, “sovereigns, supra-nationals and agencies typically blaze a trail for companies by doing ESG-linked debt deals and Chile’s sale may encourage corporations to issue more social bonds, which helped the global sustainable debt market to grow by 29% to a record $732 billion last year.”

In Brazil, sustainable bonds are also becoming more popular. In December 2020, Banco do Desenvolvimento de Minas (BESG TraDMG) was the first development bank in Brazil to issue sustainable bonds. Also in 2020, the pulp and paper Brazilian company Suzano was the first to issue a sustainability-linked bond from the emerging markets with its US$750 million issuance, committing Suzano to reduce its carbon emission by 11% by 2025. In January 2021, BTG Pactual became the first bank in Latin America to join the Nasdaq Sustainable Bond Network after raising US$500 million in green bonds sold in the international market. More recently, other Brazilian companies such as Klabin, a paper company, Movida Participacoes S.A., a vehicle leasing company, and Simpar S.A., a logistics company, have followed the trend and issued sustainability-linked bonds this year.

Mexico became the first country in the world to issue a Sovereign Sustainable Development Goals (SDGs) Bond in September 2020 for a total amount of US$890 million, partnering with the UN Development Programme (UNDP), which was invited by the Government of Mexico to participate in the initiative.

The Banco Davivienda S.A. (Davivienda Group) in Colombia issued a gender-focused Social Bond on a deal worth US$100 million in August 2020. The bonds were acquired in full by IDB Invest and the funds will be exclusively used to finance women entrepreneurs and the purchase of social interest houses by women in Colombia. This was the first gender-focused social bond in South America issued in accordance with international standards.

In January 2021, Ecuador issued the world’s first Sovereign Social Bond backed by a guarantee from the Inter-American Development Bank (IDB) and raising US$400 million for its “Misión Casa para Todos” housing program.

Also in January 2021, the Argentinian company, MercadoLibre, Inc., issued its US$400 million Sustainability Notes. The proceeds are intended to finance projects that increase investment in financial inclusion, reduce the issuer’s environmental footprint and promote social development and empowerment through education in order to foster the inclusion of young people in the job market. The issuance was aligned with the requirements of the International Capital Markets Association’s Green Bond Principles, Social Bond Principles and the Sustainability Bond Guidelines.

The growth of ESG investing in Latin America is expected to lead to a standardization of classifications and frameworks that, in turn, are expected to accelerate the growth of this market and also make ESG criteria more robust and ESG investments a more solid and reliable investment option for investors. This is especially important in Latin America where it is sometimes challenging to encourage investment in capital markets due to market perception. Some investors remain skeptical about the Brazilian market, for example, considering the country’s history of corruption, social inequality and deforestation.

With the growth of ESG investing stronger regulation is also expected which, in turn, should lead to a more investor-friendly regulated market for investment in those countries. In Brazil, the Brazilian Securities and Exchange Commission (CVM) has proposed new disclosure requirements in order to increase transparency for ESG investors. Paraguay and Colombia have also launched guidelines for the issuance of green bonds, while Chile and Peru have proposed that pension funds incorporate ESG standards in their investment policies.

The level of growth that will follow the initial boost of ESG investing in Latin America will depend on the solidification of the market for sustainable investments. This will require the establishment of regulations, standards and guidelines from the public sector, as well as government transparency. Private companies will also need to be able to demonstrate strong, transparent governance and compliance with ESG standards to not only become an investment option, but also to continue to appeal to investors concerned about a commitment to social and environmental issues.