Founded in 2010, Sustainable Strategies is a social, environmental and sustainability boutique consulting firm operating in Latin America, and IsoMetrix partner. In this article, Sustainable Strategies President Nikki Bahr explores various ESG risks for investors, and some appropriate mitigation strategies.
ESG risk examples
ESG risks and their associated strategies relate to a variety of factors including climate change mitigation and adaptation, environmental management practices and duty of care, working and safety conditions, respect for human rights, anti-bribery and corruption practices, and compliance to relevant laws and regulations.
A key component of sustainable and responsible investing is incorporating environmental, social, and corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes. This includes avoiding companies that do not meet certain ESG performance thresholds.
What does ESG entail for the financial community?
ESG is changing the investment landscape worldwide, with Latin America being no exception. Accelerated adoption of ESG metrics by the financial community is radically changing the way directors of publicly traded companies, and those looking to raise capital from funds or international financial organizations, need to think about sustainability.
Clearly communicated ESG commitments and performance are an important attraction for investors these days. Companies, projects and funds with robust and well-structured ESG strategies, management systems and communication programs not only make companies more resilient, but also make it easier for them to attract funds. It therefore becomes critical to understand which ESG topics are of particular interest to investors, how to align with what they’re looking for, and how to present your ESG information in terms of raising capital, and/or for annual company reports.
The top 3 recommendations for companies looking to report on their ESG performance
Investor approaches to ESG are affecting where funds are placed, how companies seek investment, and how they report on their performance. Increasing investor interest means that companies should have:
1. Assertive sustainability strategies: The sustainability strategies of companies should evolve from passively providing information on issues that are of interest to investors, to a more robust process of dialogue, and weighting company impacts more systematically and assertively. This requires proposing measurable commitments in the medium to long term, and demonstrating actions on how results are being achieved towards set commitments. Progress towards meeting sustainability targets are reported on publicly at Cementos Progreso and AgroAmerica for example.
2. A sustainability-focused team: Critical sustainability issues should involve managers who align sustainability to the company's strategy, as well as professional technicians with knowledge of the regulations, standards and best practices of the industry in areas such as occupational health and safety, human rights and environment. Some roles that have significantly changed in scope in relation to new ESG requirements are:
a) Corporate affairs / corporate relations: This department must clearly communicate a company’s ESG commitments, and the progress made towards them, to investors.
b) Internal lawyer: This person must identify new contractual reporting and information requirements or regulatory requirements to operate in different markets, or to do business with investors seeking to ensure ESG impact. In Spain for example, Law 11/2018 on Non-Financial Information and Diversity requires companies based in that country, and of a certain size, to publish non-financial information on environmental and social issues. These include human rights, the fight against corruption and bribery, supply chain details, and the origin of minerals from areas affected by conflict.
3. Controlling ESG communication: Companies should seek to publish sustainability reports using the GRI (Global Reporting Initiative) standards, and possibly look to report on the metrics and information required by other regulations and rating agencies as well.
Which ESG regulations are the most common in Latin America?
There has been a recent proliferation of standards designed to standardize sustainability metrics and commitments. They are not regionally focused; the following regulations and/or initiatives can be considered to be global:
a. United Nations Global Compact
b. United Nations Sustainable Development Goals
c. Principles of Responsible Investment (PRI) (Sustainable Strategies is a member)
d. Task Force on Climate-related Financial Disclosure (TCFD)
e. CDP (formerly Carbon Disclosure Project)
f. Task Force on Nature-related Financial Disclosures (currently in development)
What are some of the ESG rating agencies?
An ESG rating is designed to measure a company's resilience to long-term ESG risks. Ratings agencies use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks, and how well they manage those risks relative to peers. The rating may currently include only governance issues, but the use of rating agencies to ensure ESG practices in funds, bonds, loans, and other financial tools is growing.
Some of the leading ESG research companies include VigeoEIRIS, Bloomberg, MSCI, DJSI (Dow Jones Sustainability Index), Sustainalytics and Thomson Reuters. There are also several specialist firms such as CDP, Robeco SAM and FTSE Russell.
How important is ESG data in overall strategy?
Risk management for investors now includes a detailed breakdown of ESG data and the risks that a company may present due to its industry, location, clients or other factors.
Each company must therefore understand the ESG risks associated with its business, and the quantity and quality of ESG data required by its investors. Effectively managing these issues and reporting on them can assist in raising and retaining capital investment.
Sustainable Strategies has provided ESG assistance to large Latin American companies such as BanColombia, Cementos Progreso, Aceros de Guatemala, CMI Energy, Pacific Solar Energy, Hochschild Mining, and Goldcorp amongst others. We collaborate with IsoMetrix in Latin America to provide technology expertise, and to help our clients with their ESG data compilation and analysis. We believe that an integrated risk management platform such as the one provided by IsoMetrix is the ideal platform and tool to use in this endeavour.
About Sustainable Strategies
Sustainable Strategies is an environmental and sustainability boutique consulting firm operating in Latin America. Founded in 2010, the organization works closely with responsible developers, investors, and decision-makers, ensuring that companies and projects are socially, environmentally, and economically viable.
The company develops strategies that foster competitive advantage, and have long-lasting positive impacts on the societies in which its clients operate. It also works with investors to ensure that companies comply with the rule of law, international standards, and industry best practices.