ESG criteria: The requirements of sustainable finance

Latin America is one of the regions hardest hit by climate change in the world. Brazil, Mexico, Venezuela, Chile, and Argentina are the countries most likely to experience extreme annual droughts. To combat this, countries have implemented national sustainable finance policies. That is, they have started to take social and environmental factors into account in long-term investment decisions.

This means that organizations have focused on enhancing their ability to raise resources for their activities based on environmental, social, and corporate governance (ESG) criteria in addition to financial ones.

This shift towards green finance represents an opportunity for the region's transition to a more inclusive, zero negative impact economy.

Accelerating changes

Changes have occurred rapidly and their speed will continue to increase. There is now a considerable market of investors looking to invest their money in more sustainable institutions. At the same time, many banks are required to demonstrate in their annual reports how much of their lending has gone to projects that favor the decarbonization of the economy.

This has meant that access to financing from financial institutions is favored for those organizations that take ESG criteria into consideration and present Sustainability Reports and associated indicators.

In this line, the Chilean Financial Market Commission published a regulation that obliges issuers of publicly offered securities to provide investors with all information that would be considered important for their investment decisions. These include environmental, social, and governance (ESG) policies, practices, and objectives that relate to the business model and execution of projects.

Like Chile, all Latin American countries and the world are moving in the same direction. And it is to be expected that in three years' time, medium-sized companies will also have to comply with these guidelines. That is why to achieve compliance it is necessary to be ahead of the changes, regardless of the size of the company.

The Trend is Sustainable Finance

In terms of trends that are driving sustainable finance in Latin America, we can mention the following:

  1. ESG Funds: By examining environmental, social, and corporate governance variables in the investment selection process, capital is allocated to companies or projects that seek to invest in renewable energy, reduce their carbon output, and other actions that generate a positive impact on the environment.
  2. Green and Sustainable Bonds: Seeking to finance clear, achievable, and measurable sustainable objectives, the sustainable bond market in Latin America has grown by leaps and bounds with Brazil, Chile, and Mexico leading the way. Chile, for example, issued its first green bonds worth USD 1.4 billion in 2019.
 This trend cannot be ignored, it will mark the real possibility of accessing financing in the medium term.

 

Digital solutions have taken on an important role in the relationship between Sustainable Development and corporate finance in Latin America, enabling investors and companies to make informed and transparent decisions. M-Risk software works in accordance with international industry standards and regulations and provides advanced digital tools to manage and support environmental, social, and economic compliance information through automated graphs, charts, and reports.

Positive impacts on the environment, benefiting society, and not losing sight of economic profitability are elements that sustainable finance and new regulations pursue. Incorporating technology in the form of software drives and accelerates these changes within organizations, generating the cultural change required for compliance.

Sustainability at the heart of the business, raising the long-term view in investment decisions, and incorporating other complexities will characterize the business world. Successful companies will be those that start down this path first.

 

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