The inclusion of Environmental, Social and Governance (ESG) criteria in investment is expanding in Mexico. However, for companies to consider these other aspects, in addition to their performance, remains a challenge.
Luisa Montes, director of Ecovalues, a civil association dedicated to promoting responsible investment and sustainability certification, says that all companies must comply with environmental regulations and should not be applauded for this. However, ESG ratings encourage companies to find incentives and go beyond legal requirements.
According to the study “The Stock Market and the Climate Objectives of Mexico” by the company Mexico CO2 published in November last year, 57% of the issuers on the Mexican Stock Exchange (BMV) have reports that consider ESG aspects.
Investors in Mexico are increasingly demanding that companies comply with sustainable practices in their operations. For example, starting this month, Retirement Fund Managers (Afores) adopt ESG criteria in their investments.
In an interview, Montes details the evolution of these criteria and their challenges ahead in the country.
— What is needed for companies' reports on the application of ESG criteria to be generalized?
Companies, like all living beings, are driven by incentives. As long as they don't have any incentive to do their report, why they should, it 's a cost for them. So if they have already started doing it, it is because they have already understood that it has a value for them, both to be in the index (formerly a sustainable CPI, today the S&P/BMV Total Mexico ESG index), and because there are clients or investors who appreciate it and ask for it. But as long as this doesn't happen then why should they do it.
I'm going to tell you something very important. As of January 2022, all Afores begin to request their ESG report from all the companies in which they are investing, because Consar asked them to analyze the ESG performance of all the companies in which they invest. So there is a very strong incentive to start doing it.
— In relation to what is happening in other countries, what weight do these criteria currently have in Mexico? Are there any differences or are we in international standards?
Compared at the international level, I think we are far behind Europe, especially the Nordic countries, I think that there must be very few companies that do not report (ESG criteria); and we are also behind the United States; Brazil is a little further ahead, and Chile is moving forward there. We in Mexico are going with them, with Colombia and Chile, I think.
— You were making the Business Sustainability Index, what conclusions did you obtain at that time regarding whether Mexican companies were at the international level.
The Sustainability Index started in 2011 and we were the qualifiers for 5 years. So what we did was to see the environmental, social and governance performance of the companies and the highest-rated companies entered the index. During those 5 years I can tell you that about 8 companies were internationally active. Now the qualifier is Standard & Poor's and that trend has more or less continued.
Now on the question of how many sustainable companies are, we really don't know why the Mexican Stock Exchange decided to top the index at 30 companies. So some come out and others come in every year.
Also, now the BIVA stock exchange has its sustainability index (FTSE4Good BIVA sustainable index) and there you can also see the list of companies that are qualified, with another methodology, but also ASG.
— Did that decision to hit them at 30 seem sensible to you?
Not much, mind you, the idea of the Stock Exchange is that only the 30 best enter, but this has a lot of bad consequences. It discourages companies that are starting out that are following a path that they have invested a lot, but that do not reach number 30 and then it is very sad that companies that have made an important journey cannot enter.
— Should a good investment with ESG criteria result in better profitability for a company? Why?
First, because analyzing the environmental-social aspects of corporate governance is analyzing risks that can be generated for the company, so if you are reducing your risks then you will have lower costs. And on the other hand, you have better relationships with the community, with the financiers, with the government, so you have better opportunities both nationally and internationally, so let's say that the negatives go down and the positives rise.
— I read that you previously warned about greenwashing (simulation of carrying out sustainable operations). How then can we shield ourselves from these simulations?
We are asking companies that the most important information they put in their report be audited, so we are trying to avoid greenwashing.
I think there are two types of greenwashing. The one that companies do unintentionally, because it's very difficult to measure emissions, or indirect emissions. And then an estimate is made and it could lend itself to misunderstanding. And the one that is done on purpose, but it's very difficult for a company to lie consistently year after year. There could be a year in which it was done as a makeup of some of the data, but in general companies that report and do it in a transparent way it is difficult for them to do this greenwash.
— Regarding the role of the government, can it make it easier for companies to meet these criteria?
The Ministry of the Environment and the Ministry of Finance and Public Credit have some incentives for companies that invest in cleaner technology, but that has to do with regulation. All companies have to comply with environmental regulation, what an ESG rating does is what qualifies the company to go beyond regulation. Regulation has to be the minimum floor that companies have to comply with, and no one should reward any company for complying with the law.
What the sustainability index does is to qualify that companies go beyond the law, much more than what the law asks of them.
In this six-year period, the importance of the environmental aspect has not been well understood, rather we are going backwards. Let's hope we can recover the clean energy course and everything you already know.
— On another subject, this six-year term began with the acquisition of green bonds. Can these bonds be audited so that this acquired debt is actually aimed at green issues?
Yes, at the international level, any issuer of green bonds is required to report annually what they did with that money, so the Ministry of Finance, the government of Mexico, all report every year the use of the funds and investors have the right to analyze those reports.
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