A paradigm shift in sustainable investment for Latin America

More than ever, the major environmental, social and economic challenges facing humanity today underscore the need to make structural changes to our economic system, both in the way we produce and the way we consume. Governments and corporate sectors are called upon to increasingly make decisions by placing sustainability criteria at the heart of everything they do, seeking to balance the creation of economic value with protection of the very environmental and social systems that support and make their existence possible.

The financial sector and capital markets play a fundamental role. The consideration of non-financial issues when making financing and investment decisions is gaining greater relevance as the risks and opportunities detected by applying ESG analysis become clearer.

In spite of the fact that sustainable investing is nothing new and has been steadily evolving for a long time now, from value-based investing to socially responsible investing (SRI), COVID-19 has served as a major catalyst for the future of ESG practices. It has underlined the need for joint action to be taken if we are to tackle the challenges we all face. There is a growing body of evidence that shows that optimum working conditions, transparency, mitigating negative effects on ecosystems and, generally speaking, having a positive impact on company stakeholder groups, constitute an advantage when it comes to creating added value and standing the test of time.

 

Adapting and evolving
Ultimately, sustainability is a company’s institutional capacity for building trust and adapting to new expectations, in terms of both the market and in relation to the relevant regulatory authorities. Addressing this fact, Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change, has stated that 50 percent of the world’s corporations are now adapting to sustainable frameworks and recognising that doing so has a significant impact on their profitability.

The pandemic has exposed and exacerbated the challenges that we have faced for years, especially in the social arena. It is crucial to understand that many of its impacts are here to stay. The overall disruption seen so far has required a certain amount of intervention from both the public and private sectors to ensure the recovery of their economies, but this in turn has given us the opportunity to look ahead in terms of sustainability principles.

Within this ESG universe, we have defined climate change as a major factor, understanding it as perhaps the greatest challenge faced by humanity

The role of investors is no less important in this respect, since through their capital allocation decisions they are effectively injecting liquidity into the different economies, while encouraging activities that help enhance sustainability. Under the UK’s Green Finance Strategy, sustainable investing can be understood from three standpoints. Firstly, we have ‘Greening Finance,’ which consists of systematically integrating ESG criteria into mainstream investment analysis to help make more informed decisions. In this way, investors are provided with a more complete picture of a company’s strategy, risks and opportunities, and to potentially influence its practices to improve corporate sustainability standards. Secondly and thirdly, we have the ‘Financing Green’ and ‘Capturing the Opportunity’ components, which are about mobilising capital to sectors and technologies that pave the way towards cleaner technologies, enhanced levels of decarbonisation and greater sustainable development, and that are increasingly becoming good investment opportunities.

 

Continuous increase in numbers
Latin America has not lagged behind in this global transition; indeed, 2020 was a year in which sustainable investment has greatly expanded throughout the region. An example of this is the increase in the number of PRI signatories, which went from 28 in 2019 to, at the time of going to press, 69 in 2020. This shows a much greater interest and commitment on the part of institutional investors and investment managers in incorporating ESG criteria in their processes. Financial regulators and oversight authorities are moving ahead with new regulations and technical guidelines to promote the disclosure of ESG information by market players. We have also seen initiatives being taken by public-private associations such as the Green Finance Advisory Council in Mexico (CCFV), which recently launched an initiative signed by more than 70 institutional investors representing assets under management that account for 25 percent of the country’s GDP, requesting more disclosure from listed companies around their ESG practices and climate mitigation targets.

In addition to this, the Responsible Investing Program (PIR) in Peru, the Responsible Investment Taskforce in Colombia and the Green Finance Roundtable in Chile have gained greater importance in furthering knowledge, defining common standards and cementing collaborative relationships with issuers around the topic of sustainable investment.

 

Building momentum
At SURA Investment Management we are committed to strengthening our sustainable investment capabilities. As PRI signatories, we are making decisive progress with incorporating ESG criteria in our investment processes, doing so in a cross-cutting fashion with all types of assets. We have the firm conviction that this not only strengthens our investment criteria, but allows us to help create well-being and enhance sustainable development throughout Latin America. We understand sustainable investment as an investment philosophy, being aware that it is a process that we must build upon.

We are making good progress, having taken significant steps to factor ESG into our processes. Currently, our bottom-up analysis of potential investee companies includes a review of their ESG performance and their relationship with their stakeholders. To this end, we have developed a proprietary ESG assessment methodology that prioritises and weighs up environmental, social and governance factors within the context of the relevant sector. This provides an initial score based on input information that we obtain directly from these potential companies through ESG questionnaires, which we then proceed to supplement with analysis from an external data provider. Analysing a large dataset in this way ensures that our process is all the more robust when it comes to identifying investment risks or strengths.

Within this ESG universe, we have defined climate change as a major factor, understanding it as perhaps the greatest challenge faced by humanity; its increasingly tangible effects are having an impact on all sectors and geographies. Coordinating the efforts of different social actors is essential if we are to achieve the goal of not exceeding a 2°C increase in global warming. To this end, we recently formed an alliance with 2° Investing Initiative, a thinktank that works to align financial markets and regulations with the Paris Agreement goals. We will be carrying out a joint investigation on the potential for building a Latin American Market Portfolio that is aligned with this objective.

We are also incorporating ESG criteria in our decisions to invest in alternative assets. We carry out rigorous due diligence that includes an assessment of the environmental and social practices deployed by the projects in which we invest. Furthermore, we are striving to adhere to international standards. In terms of our infrastructure debt strategy, for example, we ensure that the projects that we finance are carried out according to the Environmental and Social Performance Standards of the International Finance Corporation (IFC) as well as its Equator Principles. This requires that, in addition to complying with all applicable regulations, they must provide a comprehensive view of their impact and take compensatory or mitigation action when necessary.

When it comes to our real estate investments, we ensure that all our property development projects carry green building certifications. We are currently drawing up a plan for integrating standards that will ensure the efficient use of resources as well as promoting the wellbeing of the people who inhabit them. An example of this ambitious process is the construction of the soon-to-be completed Nueva Córdova building. The first building in Chile to have a photovoltaic façade integrated into its structure right from the initial drawing-board stage, it will prevent the emission of 190 tons of CO2 per year. Furthermore, this project is currently in the process of obtaining its LEED Gold Certification, by incorporating technology designed to enhance the quality of its indoor environment and offering chargers for electric vehicles and bicycles.

 

Push things forward
Clearly there are challenges ahead when it comes to implementing sustainable investment practices: comparable ESG information must be frequently and readily available; markets must move towards more homologous assessment standards that allow for ESG criteria to be incorporated into the pricing process, as well as for more significant movements of capital. Another task ahead is adapting international methodologies to the reality of our own region, as well as establishing mechanisms to avoid ‘greenwashing’, since this would prevent the required structural changes from taking place. However, for us it is a very good sign that Latin America is joining forces with this global push for action and that more and more actors throughout the region are furthering their knowledge from the standpoint of being able to connect sustainability with financial returns.

At SURA Investment Management we are taking on an active regional role through our commitment to sustainable development, as a cross-cutting element of our investment philosophy as well as part of our core asset management strategy. We hope to set ourselves apart by drawing up ESG solutions and placing them at the service of our institutional investors. By doing so, we aim to contribute to the construction of a more sustainable region and planet, creating long-term value along the way.