A Level Playing Field

There is no denying that the inflow of investment and the popping up of multinational businesses—read American—here and there will improve Mexico’s economy and the nation’s quality of life, but should these be achieved at the cost of ruining the environment and the social fabric, using dubious methods of corporate governance? The short answer is “not necessarily.”

The days that big corporations could do as they pleased are seemingly over, not only in developed economies, but also in markets such as Mexico which are still developing. Companies operating in local and overseas markets are increasingly expected to take ESG-related factors into account—the acronym ESG stands for environmental, social, and corporate governance.

ESG, in short, is a batch of indicators for making a distinction between those corporations which behave like mindless money-making machines and those which are taking steps to ensure the sustainability, eco-friendliness, and social impacts of their practices. The widespread use of ESG measures is making corporations and businesses more accountable than ever for the results of their actions.

The importance of ESG-related practices has undergone a manifold growth between 2015 and 2020, with almost USD18 billion being earmarked for ESG compliance by large corporations in 2019, alone, according to the Wall Street Journal. Mexico is no exception. Indeed, Mexico has been ahead of the rest of the Latam region in terms of minding the necessity of ESG measures.
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which was founded by Banco de México and seven other Mexican entities is in charge of making sure that all investors who come to Mexico abide by ESG principles. Banco de México and NGFS believe that every credit or financing arrangement come with an inseparable set of associated environmental and social risks, in addition to the financial opportunities they create.

Under such circumstances, sound ESG policymaking can maximize the benefits of investment, while keeping the negative environmental and social impacts in check. There is no denying that every investment may have some negative impact on the environment or society of the recipient nation, but there are measures to lower the downsides to an absolute minimum. Meanwhile the inevitable environmental and social damages can be compensated by green finance policies and levying fines on those who have a disregard for ESG standards.

Several international entities have taken a keen interest in Mexico’s progressive green finance projects. The 2019 steering committee meeting of the NGFS and Mexico’s pan-American green finance seminar were attended by Sir Roger Gifford, representing the City of London’s Green Finance Initiative, the Chinese famous green economist, Ma Jun, and the Policy Advisor to the European Commission, Maarten Vleeschhouwer.

The implementation of ESG principles may not be optional or a nice gesture any longer; it may soon become an obligatory requirement by national financial regulators. Alba Aguilar, new markets director of MexiCO2, noted that, “we are in an early stage. All this is voluntary but still sends a clear message to the market. That’s why we set up the Consultative Committee,” in an interview with the responsible investor (RI), adding that “the stage when people just didn’t get it is over. Now it is more about how to be prepared before the regulator makes it mandatory.”

Among the factors “environmental,” “social,” and “governance,” the latter item is perhaps the most neglected in Mexico. Many companies in Mexico, ranging from economic giants to small and medium-sized enterprises (SMEs) are essentially controlled by families or circles of friends. As such, minority shareholders are often denied of their right to participate in the corporate governance process.

Although Mexican laws allow minority shareholders (with 10% of shares or more) to have a say in making major decisions, large shareholders often sidestep this piece of legislation by limiting the shares owned by minority shareholders to 9.9% or less. This, too, needs as much attention as the environmental and social considerations. If corporations that disturb the ecosystem or undermine the society are fined in Mexico, corporations with questionable and unfair governance structures should be held accountable, too.

There is still much room for improvement. The disclosure of ESG reports is not still mandatory across the country, even for publicly funded entities, let alone for private businesses and multinational enterprises. In the UK, for instance, all listed companies are expected to regularly disclose information regarding their greenhouse gas emissions, carbon footprint, their compliance with diversity and equal opportunities laws, and some critical information about their governance and management models.

There are similar—albeit less progressive—regulations in place in the US, the EU, and India. Mexican lawmakers can—and perhaps should—take steps toward making the disclosure of ESG reports mandatory in the future, guaranteeing the healthiness and fairness of the nation’s businesses ecosystem for all parties concerned.
Nevertheless, Mexican public and private businesses have become increasingly conscious about ESG practices—at least ecological sustainability. Jorge Treviño, Director General of ECOCE, a pioneer of the recycling industry in Mexico, told TBY that “now, the Mexican consumer is demanding more requirements from companies and is more aware of climate change. There has been a growing interest in investing in recycling projects, an industry that generates many benefits to Mexico, including jobs and tax payments.”

As the economy continues to develop, the public will naturally demand to know more not only about ecological indicators, but also about the social impact of businesses and their governance practices. This undoubtedly needs to be backed up by appropriate legislation in terms of mandatory ESG data disclosure and choosing the right ESG indicators for every sector. œ–