LatAm gaining ground in ESG stakes as Andean institutional investors raise bar

Institutional investors in Chile, Colombia and Peru – particularly private pension fund managers – will help raise the bar in the responsible investing stakes in Latin America, a sector specialist told an Andean region-focused ESG conference hosted by Fitch.

Combined, the private pension fund, or AFP, systems of the three countries have around US$310bn in assets under management (AUM), according to details from their respective regulators. 

Chile has seven AFPs, accounting for around US$195bn in AUM, while Peru (US$42bn in AUM) and Colombia (US$73bn in AUM), have four each. 

UN-backed initiative Principles for Responsible Investment (PRI) – which more than 3,000 asset owners and investment managers have signed up to globally – works with 10 institutional, long-term investors across the three countries: nine private pension funds and an insurer. 

Eduardo Atehortua, director of Spanish-speaking Latin America for PRI, said the tally will grow amid a trend of increased adoption of ESG – or environmental, social and governance – criteria being observed across the entire region.

“These 10 organizations – along this those that will surely arrive over the coming months and years – will certainly instill a greater sense of urgency for responsible investment,” Atehortua said.

“And all those investment managers in the region that have some relation with these pension funds or insurers will have to advance in terms of responsible investment practices. They are not going to have excuses not to do it – these organizations are going to demand they have responsible investment practices.”

While Latin America is lagging regions such as North America and Europe in the ESG stakes – principally because it was “late to the party” – the region is gaining ground apace, the webcast was told.

“The good news is that, while this gap still exists – it’s real, there remain gaps in capacity and development of the responsible investment market in Latin America and other parts of the world – it is closing quickly,” Atehortua said.

Atehortua added that PRI’s portfolio of Latin American signatories had grown 130% in the 12 months through September. 

MetLife credit research director Hernán Kisluk, echoing comments made by José Martínez, executive VP of investment at Peruvian insurer Rímac Seguros, said his company had long considered ESG factors in the decision-making and risk-analysis process.

“It [ESG] is clearly growing … ESG will be considered an area of its own, not just in the sphere of risk prevention but also in terms of how our investments can support sustainable development in each of the three areas,” Kisluk said.

Martínez, whose company has a global investment portfolio of around US$3bn, said ignoring ESG factors in the decision-making process can have a negative impact on profits and snarl progress of expansion projects. 

In the context of ESG, Franco Piza, corporate director of sustainability at Colombian financial services player Bancolombia, said he envisaged the emergence of private and public debt-structuring opportunities linked to sustainability-focused economic reactivation initiatives in the region. 

Piza added that, in general, ESG-focused funds have tended to perform better than others. 

THE WIDER PICTURE, CHALLENGES

In an associated report, Fitch said equities was the early driver of ESG globally.

“While the initial focus was on equities, the much bigger fixed income universe has taken an increased interest in ESG investing across all asset classes: financial and non-financial corporates; public finance; project finance; and structured finance – although some areas are encountering more demand than others,” the report said.

It added: “Due to client demand and the large number of studies showing links between ESG factors and investing and financial performance, investor awareness and understanding of the financial benefits of ESG investing has grown tremendously.”

A challenge for greater ESG adoption in Latin America and beyond is educating asset owners and investment managers and standardizing the likes of reporting standards and taxonomy. 

CHINA AND ESG?

Mervyn Tang, ESG global director at Fitch, said that with China, there “is a lot of different moving parts.”

In the retail investment space, there is little focus on ESG.

“But if you look at asset managers in China, they are actually increasing their ESG considerations considerably because it is becoming clearer and clearer that if they wanted to win mandates from asset owners in developed markets, they need an ESG framework in place,” Tang said.

He added that large Chinese bond issuers operating in the international capital markets, among them players investing in Latin America, are “paying more and more attention to ESG,” citing foreign pressure.

On the ESG front, specifically the environment pillar, Beijing recently announced a plan to achieve carbon neutrality by 2060. Market observers are waiting for concrete details. 

“Developments in ESG in China will have repercussions for the rest of the world, including LatAm, given the investment focus here,” Tang said.