Criteria for ESG investment, evaluation becoming broader in LatAm – analysts

Protecting the environment and working hand in hand with the communities in which they operate is no longer enough for a company to be classified as socially responsible.

Adhering to environmental, social and governance (ESG) criteria, implies following new guidelines that allow investors to generate portfolios that demonstrate their commitment to the environment, society and responsible management of their assets.

The challenge is even more significant for companies that operate in extractive industries, such as mining, and oil and gas, but the criteria are now being extended to other sectors, such as infrastructure and renewable energy.

Ailsa Rosales, a risk analyst for Latin America at S&P Global Market Intelligence, said on Tuesday during a webcast on sustainability in the region that financial institutions face more pressure regarding sustainable investing, forcing them to take "a much more holistic view" of ESG.

"When we talk about challenges, we're thinking a lot about how, as these criteria for ESG investment and ESG evaluation are becoming broader, the sectors that are being affected by this are also expanding," Rosales said. "We're seeing a broadening of the categories being used to exclude projects."

She explained that exclusions in ESG have traditionally been applied more broadly to entire products based on perceptions of environmental damage, such as excluding fossil fuels based on concerns about their contributions to wider climate change and global warming issues. 

But there is also a trend of financial institutions incorporating more of these environmental and other criteria based on new types of activities, standards and behavior, according to the analyst. 

"This is why we're seeing things like encroachment onto indigenous territory operating in environmental conservation areas, as well as concerns around labor rights and wages. So we're seeing the shift from these more product-based exclusions into this broader range of categories," Rosales said.

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The S&P analyst also highlighted that there is increasing activism from NGOs in the region, and some of the triggers that S&P has been following regarding that activism are deforestation and community consultations. 

"So that's where communities are demanding to be consulted about projects before they instigate issues surrounding contamination and, again, territorial encroachment," she said.

With regard to companies, Manuel González, senior director for Latin America at S&P Dow Jones Indices, told the webcast that they are trying to be more transparent and provide more data, but this is a tough challenge for private firms that do not necessarily have the personnel and resources to create teams focused on ESG and to comply with greater transparency.

Paloma García Segura, an independent mining and environmental consultant in Mexico, told BNamericas in private comments that creating teams dedicated to ESG is a trend that we will certainly see more and more, and this has already happened with environmental issues. 

"30 years ago, there were no departments for environmental issues, and suddenly they started becoming more professional. The same has happened with the social aspect. When you arrived somewhere, the geologists or human resources used to begin doing it. Not now. There's already a social area with people trained in development issues, social anthropology and fieldwork, and it's becoming increasingly specialized," García added.

González, from S&P Dow Jones Indices, said that one of the big challenges for companies is providing more information related to the bond they are issuing or the project they are implementing and the company itself. 

"We can't say that, okay, let's look at the project, but not as a company. Everybody is trying to look at all elements of both factors."

Another challenge the analyst has seen in the region is that investors are trying to influence companies more, have more participation and have a say in firms' decisions.

Finally, González said that something that he sees in the future is a taxonomy, or a common classification system containing a list of environmentally sustainable economic activities, like the EU taxonomy created to meet the EU's climate and energy targets for 2030 and achieve the objectives of the European green deal.

"They [institutional investors] are going to start looking at the gross data and making decisions that will be safe. That's something that they will see in the future, trying to understand and make decisions," González said. 

The analyst added that they would receive support from data providers for that, given they are trying to use their data or developing their own research to determine companies' scores in countries like Mexico.