The state of ESG adoption in Mexico

The integration of environmental, social and government (ESG) standards in corporate debt issuance and sustainable investment instruments appears to be moving more swiftly every year, particularly in Europe, which continues to lead the globe on investment in ESG-based, green and climate-related debt instruments.

To put it into context, according to the Global Sustainable Investment Alliance’s recently released 2018 Global Sustainable Investment Review, assets under management using sustainable, responsible and impact investing strategies stood at US$30.7tn globally at the start of 2018, a 68% increase compared with four years earlier.

Another ESG-minded program, the Climate Bond Initiative, is working towards mobilizing a global capital market of US$100bn for climate change solutions.

And while sustainable investment and ESG-based initiatives might still be flying under the radar for small Latin American investors, institutional investors are paying attention, especially in Mexico, with the country already a regional leader in green bond issuances.

But activity is appearing elsewhere in Latin America, as seen in Chile, Peru and Colombia this year with their first issuances.

That said, while Moody’s expects to see US$200bn in green bond issuances worldwide, Latin America is expected to only make up a tiny fraction of this, having produced only 1% of the green bond issuances in 2018.

Sadly, the largest green bond issuer from Latin America had been the Mexico City Airport Trust NAFIN F/80460 (MEXCAT) bond, whose aggregate US$6bn of green bonds have since been removed from the Climate Bonds Initiative's green bond dataset, thanks to Mexican President Andrés Manuel López Obrador’s decision to cancel the Mexico City airport in Texcoco, coming late last year.

In an interview with BNamericas, Adrian Garza, vice president and senior analyst for corporate finance at Moody’s de México, explained that Mexican institutional investors are still showing growing interest in green bonds and other ESG issues, though noting that Mexico still needs a regulatory push to unleash the full potential here.

Opportunity for issuers

However, Garza added, local corporations looking to tap foreign capital are starting to see new possibilities coming with adherence to ESG principals.

“From the issuing side, that of companies, those needing to do cross-border issuances, to access international markets, [ESG] is probably going to become increasingly important in their agenda because it's becoming increasingly important on the international investment side,” said Arian Garza, vice president and senior analyst for corporate finance at Moody’s de México, in an interview with BNamericas.

Garza added that while having a strong ESG profile may not yet get a corporate issuer a lower interest rate on its debt issuances, “at least you open more possibilities,” being able to attract investors that have strict guidelines for ESG standards or by accessing financing instruments that are built on strict standards of sustainability, for example.

Mexican adoption of ESG

One of the most advanced ESG-related initiatives worldwide is the UN Principals for Responsible Investment (PRI).

Launched in 2006 as an international framework to integrate ESG issues into investment, signatories agree to incorporate ESG issues into investment analysis, ownership policies and practices, agree to make appropriate disclosures on ESG issues, to promote acceptance and implementation of the PRI, work together to enhance PRI effectiveness, and report on activities and progress regularly.

On Wednesday, Mexico’s own Fondo de Fondos (Fund of Funds) – an investment firm specializing in private equity funds, which currently manages more than US$700mn focusing on Mexico’s energy and infrastructure sectors – became the latest signatory to the PRI.

And with Fondo de Fondos, there are now 10 signatories to the UN's PRI in Mexico. The following table details each of the Mexican signatories, the date of the signature and the class under which they have signed to the agreement.

Mexico took another step forward on December 14, 2018, when 51 institutional investors in Mexico, who together manage 4.52tn pesos (US$225bn) in assets, signed a declaration in favor of the disclosure of ESG information, under the framework of a collaboration agreement between Mexico’s green finance advisory council (CCFV) and the City of London Green Finance Initiative.

In this document, private pension fund managers (Afores), insurance companies, investment fund operators, investment advisors and development banks formally recognized ESG information as an important issue for investment analysis and the efficient allocation of resources.

In comments given to The Funds Society, at the time of the signing, Peter Estlin, Lord Mayor of the City of London Corporation, said, "International collaboration is key to accelerate the development of green and sustainable finance within the global financial system. The joint work with Mexico will be fundamental to reduce emissions and achieve the objectives of the Paris Agreement.”

“This alliance represents our commitment to the transition towards a more sustainable economy, by promoting the creation of capacities to improve the analysis of non-financial information and identify risks and investment opportunities,” added Enrique Solórzano, Sura México’s CEO and co-president of the CCFV.