As the world continues to deal with the COVID-19 pandemic, several challenges have become more visible globally, along with major opportunities for a transformative and sustainable economic recovery in the long term.
The Latin America region is no exception. The region continues to be hit hard by the pandemic, not only in terms of public health but with respect to economic, social, and political effects as well. However, the International Monetary Fund forecasted 4.6% economic growth for the region in 2021 and some sectors, such as infrastructure and fintech, have emerged during the crisis as attractive investing opportunities.
As we look towards the future, the focus now should be on how we would like this recovery to proceed. The importance of Environmental, Social, and Governance factors, or ESG, was reaffirmed in 2020, as ESG-related products outperformed their peers during the pandemic. In particular, companies have expanded their disclosures regarding environmental issues and climate change as investor focus on this issue has grown rapidly. This has resulted in a proliferation of companies that generate "sustainability ratings" and other ratings or scores that evaluate companies' ESG bona fides.
Though not discussed as often as the environmental component of the ESG triad, the governance component encompasses major opportunities for improvement in the current context of the Latin America region, covering issues like prevention of corruption, bribery and money laundering, as well as business ethics, all of which represent major challenges in Latin America. If addressed correctly, this could become an enormous opportunity for the region to move toward a sustainable recovery.
In a recent interview, Sergio Moro and William Stellmach, shared many insights on this topic. Here are some of the main points discussed:
- Sergio expressed his view that the pandemic demonstrated that
fighting and preventing corruption must be permanent endeavors. Due
to the urgency required in dealing with the pandemic, there was
some process flexibility in terms of controls over
government procurement. As a consequence, some cases involving
bribery were discovered in the purchases of ventilators, other
supplies and even vaccines. The trend in fraud schemes also
demonstrated the need to strengthen due diligence procedures.
- He explained that one of the major challenges for the Latin
America region in preventing corruption, bribery and money
laundering is still a lack of strong law enforcement practices.
Sometimes law enforcement agencies lack the necessary resources,
while others lack independence from political influence. A reform
that improves the Courts' and law enforcement agencies'
independence, across the region, would be most impactful.
- Furthermore, in a scenario where there is a lack of strong law
enforcement against corruption, the private sector plays a pivotal
role. Companies need to realize that they could serve on the
frontline against corruption. Building a strong anti-bribery
compliance program is key to protecting companies against the risk
of becoming embroiled in corruption or extortion. It is also
important to keep in mind that companies based in Latin America
could suffer charges and fines not only from the authorities in
their own countries, but also from other foreign jurisdictions
where they have operations or maintain any kind of business.
- In this regard, Sergio mentioned that, although ESG encompasses
more than anti-corruption, a crucial part of governance in the ESG
triad revolves around antibribery and anti-fraud compliance.
Companies should develop strong policies and practices against this
type of activity. ESG is also more than just complying with the law
and avoiding risks against sanctions. ESG emphasizes the private
sector's proactive role in promoting a better world and, with
that, increasing the market value of the company and the business.
ESG means that the company needs not only to avoid illegal behavior
but also to support a culture of integrity for its
stakeholders.
- For these purposes, implementing a compliance program that
works in practice is crucial. Achieving this usually requires a
compliance department with autonomy and some level of protection to
do the work that is necessary to prevent wrongdoing and to
investigate incidents when they occur. The existence of a
confidential channel and protections for whistleblowers against
retaliation is also mandatory. Written anti-corruption policies
will not work without commitment from company leadership.
- Sergio added that one of the benefits the pandemic brought is
that it accelerated and widely diffused the use of technology in
all fields, including in compliance programs. For example,
forensics examiners increased their use of tools that support
remote collections, data mining and cloud transfers, as well as
technologies to conduct virtual interviews due to travel
restrictions and sanitary requirements. These practices will be
utilized long after the pandemic is over and these tools will
continue to increase efficiency moving forward.
- William explained that ESG has the potential to be more
impactful on Latin America than any U.S. regulatory regime. Even if
the entity is not a U.S. issuer, if it is doing business with a
U.S. company it can become an issue to the latter.
- Similarly, U.S. companies or investors contemplating
investment, increasingly scrutinize their foreign partners. This
isn't a question of FCPA due diligence, which is often
relatively discrete and straightforward. Rather, U.S. companies
increasingly seek information regarding climate, diversity and
inclusion, health and safety practices (not just meeting local
standards), and a host of issues that were never at the forefront
of the investment calculus. This is a sweeping trend, and it is
going to be enforced by the regulated entities themselves through
enhanced diligence and auditing.
- William added that ESG needs to be treated like any financial
reporting metric. That means, conducting a risk-assessment,
identifying what representations were made to investors or the
public regarding ESG and assessing the entities performance
against those statements.
- It is key to consistently, leverage the Internal Audit function
to capture ESG and climate-related representations. From an
oversight perspective, another proactive step is to identify which
board committee will have the company's ESG and/or
climate-related objectives in its mandate.
- Finally, a number of clients are actively benchmarking against competitors. A number of ratings agencies essentially do that, by ranking companies against the progress made by competitors in specific sectors. It is important to evaluate what the competition is saying about their ESG commitments and how successful follow-through is towards those commitments.
Governance matters as well as environmental and social considerations are foremost in the minds of stakeholders in the market. Consumers of goods and services around the world are now taking ESG considerations into account in their decisions. Investors have understood the importance of ESG in the mitigation of risks and sustainability of a business. Governments and regulators have also reacted proactively to this call by regulating for minimum requirements for companies and businesses to comply with. It is no more a 'nice-to-have' matter but a matter of how and when.
The recent global attention to and developments in ESG brought by the pandemic represent a major opportunity for the Latin American region, for both private and public sectors. The region could take advantage of this accelerated pace and follow suit in the promotion and implementation of effective and efficient programs and tools that contribute to the region's sustainable recovery.
Listen to the full conversation here.
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