It seems that ESG is on everybody’s mind. The term refers to a set of corporate standards around environmental, social, and governance behavior, with the goal of encouraging sustainability, transparency, and accountability at every organizational level. The movement is being driven partly by the United Nations’ 2030 Sustainable Development Goals (SDGs), but also by a change in public perception over the role that companies play in societal and cultural transformation. 

In the coming years, ESG will likely play a major role in the evolution of many of the world’s economies. The ESG framework is already gaining traction in Europe, North America, and East Asia; and governments and businesses alike are beginning to incorporate these considerations into the decision-making and risk management process for lenders, investors, and financial institutions. 

One region that has failed to keep pace with others is Latin America. Like much of the developing world, Latin America was devastated by the COVID-19 pandemic as its economic engines ground to a halt and civil unrest threatened the social infrastructure. Given that ESG will be a major factor in attracting international investment for the foreseeable future, Latin American businesses have a pressing need to incorporate ESG principles.

This is the first in a series of articles in which RSM specialists Juan Pablo Montero, from RSM Argentina; Oscar Bobadilla, from RSM Colombia; Marcelo Conti, from RSM Brazil; and Paola Piña, from RSM Chile share their expert insights on the current state of ESG adoption in Latin America and what businesses can do to lead the change that is needed. 

There’s work to do

Latin America can offer ample business opportunity, due in large part to its wealth of natural resources. However, ongoing social and environmental crises have created a laundry list of challenges that threaten to hamper or complicate the full-scale adoption of ESG. 

“For the last 30 years, the biggest social problems in Latin America have been, and continue to be, poverty, inequality, crime, unemployment, and a lack of access to health care and education”, says Juan Pablo Montero, Consulting Partner at RSM Argentina. “These issues concern society as a whole and, given the current local economic context, do not seem to have a short-term solution.”

The region is also facing several environmental crises that are directly linked to the continent’s bountiful resources, and the extraction or exploitation thereof. What is more, the adverse side effects of industrialisation are starting to seep out of the jungles, plains, and steppes into the major urban centres. 

“Environmental contamination is no longer just a rural issue,” says Oscar Bobadilla, RSM Colombia Managing Partner. “The crisis has already reached the major cities, forcing shock measures to combat its effects.” 

For ESG to take hold in Latin America, there must be a priority shift. At present, long-term concerns like climate change and diversity and inclusion take a back seat to short-term goals, such as profitability and productivity. This creates a situation where the resources that are mined or harvested are done so at great expense to the regions and communities from which they are extracted, and very little is being done to mitigate or reverse the damage. In many cases, these regions are in remote rural areas where political representation is either minimal or non-existent. The responsibility is now on businesses to support the communities that have supported them. 

The environment needs allies

By now, the growing environmental crises plaguing Latin America have been widely recognized and discussed, and few industries have been spared from scrutiny. Agriculture, manufacturing, and mining operations have all been exposed for contributing to the problem, but very few have taken any action. 

“As Latin America’s largest economy, we’ve always had our share of environmental problems,” says Marcelo Conti, Consulting Partner at RSM Brazil. “Our country suffers from large-scale deforestation, a lack of preservation of water and natural resources, gas emissions, and poor waste treatment practices.” 

The effects of apathy have been felt far and wide. Mega-mining is irreversibly contaminating water sources and soil. Deforestation from farming and construction is destroying entire ecosystems, virtually overnight. Fracking, a mining technique that extracts oil and gas from rock, uses harmful chemicals that seep into the water table and can even cause minor earthquakes. Manufacturing operations regularly pollute the local waterways with their industrial discharges, and perhaps most worrying, clean drinking water is becoming scarcer. Left unchecked, a water shortage could lead to further civil unrest and mass migration.

Some nations stand to suffer more than others if action is not taken.

“Chile is among the top ten countries that can potentially be most affected by climate change,” says Paola Piña, Partner, Head of ESG at RSM Chile. “According to the latest study by the Intergovernmental Panel of Experts on Climate Change, Chile’s low elevation and arid climates make it prone to mass-scale flooding, drought, and wildfires.”

With a growing understanding that everyone should be held accountable for these issues, the spotlight has now been put on the organizations that hold the power to enact change.

Inclusion, representation, and equality matter

Forests and water sources are not the only things impacted by industrial action or inaction. There has also been a growing awareness of the toll exacted on stakeholders when businesses fail to adhere to ESG standards. Those impacted can include employees, investors, suppliers, shareholders, customers, and the communities in which the business operates.

With poverty still a major issue in Latin America, the risk of exploitation is high. Slave labour is widespread in the wake of the pandemic as those in need are forced to accept poor working conditions to put food on the table. Villages and towns with little to no political influence watch helplessly as industries move in and set up shop, and appear to do as they please. 

While minorities in Latin America have recently made huge strides, particularly among the indigenous populations, there is still a lot of work to be done in terms of equality, inclusion, and representation. 

“A greater level of awareness has been seen at the state level and by private companies,” says Bobadilla. “They are developing initiatives aimed at positively impacting remote and less-favored communities.” 

A lack of transparency within the supply chain can put a business in significant risk. For example, a business trying to clean up its act by acting ethically and improving the sustainability of its operations may need to outsource a significant amount of work to other companies to meet customer demand and grow. The organisation may have a spotless track record when it comes to ethical conduct such as human rights or its environmental impact, but a supplier or the company they partner with as part of an outsourcing agreement may not. Today, these businesses have to take a closer look than ever before at their entire operation.

“Companies are being judged on how humanely they manage their human resources”, says Piña. “This, of course, includes how they treat their direct employees, but also how they care for the most vulnerable workers in their value chain, the ones working for a supplier somewhere down the line. Much remains to be done on their behalf, and this is one of the areas that presents the least development on a global scale.”

In 2023, it is simply not good business to exploit or ignore communities in pursuit of profit.

Businesses must lead the charge

The world’s governments alone cannot solve these crises. We live in a time where business organizations actually have more power to implement change across the board, and in a variety of ways. What is more, many of them have stated their intent to follow through on their stated ESG promises. 

“Companies have the ability to influence social and environmental design more than at any other time in history,” says Piña. “Their capacity to improve wellbeing, and their transformative potential in the communities where they operate, are circumstances that are leading the business institution to play a central role in the face of current challenges.”

At the end of the day, it all goes back to the end user. If companies want to stay on the right side of public perception, they would do well to heed the call for a greater focus on ESG. Failure to do so could result in businesses missing lucrative international investment opportunities. As always, money talks.

“On the investor side, we’ve observed that those who invest want to do so responsibly and are interested in understanding the importance of ESG factors in companies,” says Montero. “During mergers and acquisitions, analysis of ESG metrics and benchmarking are part of the due diligence process. In short, investors ask themselves: why invest in a company that is not sustainable, or does not contribute socially?”