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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.