Latin America: A new frontier for ESG-driven investors

What is the potential impact of ESG-driven investing?

“ESG” refers to a set of criteria investors can use to evaluate a company’s ethical and sustainable practices. This means closely examining a company’s environmental impact, as well as scrutinizing its social responsibilities and ethical governance practices.

In ESG-driven investing, investors allocate funds based on factors beyond financial performance, such as carbon footprint, energy consumption, labor practices, workplace safety, community engagement, and diversity. This approach isn’t just for public good; it also holds potential benefits for investors. Kroll’s ESG Returns Study found that companies with higher ESG ratings generally outperformed their peers with lower ratings.²

ESG-driven companies are generally more prepared to face certain future risks. For example:

• Efficient resource usage cuts operational costs and guards against resource scarcity risks.³
• Ethical governance practices can reduce the likelihood of legal and reputational damage due to unethical conduct or scandals.
• Fair labor practices lower the risk of labor disputes and employee turnover, saving companies time and money.⁴

All of these benefits could potentially reduce risk and enable ROI for investors.

What factors are shaping favorable ESG investing in Latin America?

Green taxonomies and related legislation

Some Latin American countries have embraced green taxonomies, which are classification tools for identifying economic activities that help countries meet environmental targets.⁵

Colombia made history in April 2022 by introducing the Western Hemisphere’s first national green taxonomy.⁶  Focusing on four laws – the clean transport, environmental crimes, energy transition, and climate action and decarbonization acts – this taxonomy will be used when issuing green bonds and can help direct private sector funds towards environmental priorities.⁷  Mexico introduced its voluntary Sustainable Taxonomy in March 2023, blending environmental and social objectives, including gender equality.⁸

However, these changes aren’t just a bureaucratic effort; they hold significant implications for Latin American companies, and therefore for investors looking to navigate Latin America’s evolving ESG landscape. They lay the groundwork for sustainable finance and environmental priorities, potentially reshaping how investors evaluate and approach opportunities in these markets.

Renewable energy targets

Many Latin American countries have adopted renewable energy targets, enabling ESG-focused investors to enjoy substantial returns when investing in companies contributing to these goals. Colombia plans to preserve 30% of its land, cut greenhouse gas emissions by 51% by 2030, and achieve carbon neutrality by 2050.⁹ Chile is pursuing carbon neutrality by 2050, retiring several thermal power plants by 2040,¹⁰  and transitioning mining giants like BHP and Anglo American to renewable energy sources.¹¹

Mexico hopes to derive 35% of its electricity from clean energy sources by 2024,¹²  and Peru is committed to a 40% emissions reduction by 2030.¹³  While modest, these goals hint at a growing sustainability trend, meaning both countries hold plenty of investment potential. Mexico’s abundant solar radiation, wind capacity, and geothermal sources offer renewable energy prospects for investors,¹⁴  while Peru could reach 81% renewable capacity by 2030.¹⁵

Green bonds

Designed to raise capital for renewable energy, energy efficiency, sustainable water management, and clean transportation projects, green bonds have gained traction among ESG-focused investors.

Chile became the first sovereign green bond issuer in the Americas in 2019 and quickly climbed to become third-largest issuer among emerging markets in 2020.¹⁶  Colombia¹⁷  and Peru¹⁸  followed suit, issuing sovereign green bonds to finance environmental, sustainability, and climate goals. Meanwhile, Mexico issued 419% more green bonds between 2020 and 2022, reaching MX $122.01 billion (US $6.7 billion) by August 2023.¹⁹

The popularity of green bonds marks Latin America as a noteworthy area for investors seeking financial returns and positive environmental impacts.

ESG finance and disclosure

ESG includes ethical governance, including disclosure and transparency, enabling investors to identify companies effectively managing risks. Such practices, reinforced by ESG reporting rules, drive companies toward ESG-aligned operations.

Chile mandates ESG reporting, with companies and financial institutions obliged to include sustainability and governance issues in their annual reports.²⁰ Likewise, the Peruvian Ministry of Environment emphasizes ESG disclosure forms, a green finance taxonomy, and investment tools as vital to a sustainable finance framework,²¹  while the Financial Superintendence of Colombia enforces ESG reporting policies, mandating pension funds and insurance companies to integrate ESG and climate risks into their investment policies and governance.²²  Meanwhile, many Mexican companies, particularly those listed on stock exchanges, voluntarily disclose their ESG practices following the Mexican Stock Exchange’s Sustainability Guide and Global Reporting Initiative standards.²³

Latin America offers potential for ESG-driven investors

The ESG landscape in Latin America is evolving rapidly, offering potential opportunities for investors who embrace sustainability and responsible investing principles. Mexico, Chile, Peru, and Colombia are only a handful of countries that have adopted legislations, targets, and policies that support ESG principles. ESG is on the rise across Latin America,²⁴  creating a favorable environment for ESG-driven investments to flourish in the following years.

References to companies are for illustrative purposes only and should not be viewed as investment recommendations.
 

Risk Warning: Investment involves risk including the loss of capital.