Examining the US ESG Backlash: Key Insights for Mexican Investors

Investors in Mexico's domestic energy and financial markets should develop more aggressive hedging strategies to limit their exposure to environmental, social, and governance (ESG) investments and projects.   

While Mexican authorities seek to raise capital in projects helping to fulfil its international sustainability commitments as well as the country’s domestic environmental and social goals, major US financial institutions are rapidly abandoning ESG standards. 

ESG funds saw outflows for the first time in their history in 2023 and 2024 and many financial market observers now expect a renewed focus on metrics such as margin growth, cash generation, and return on capital. 

Around 20 US states, including key energy producers such as Texas and Louisiana, have passed anti-ESG legislation since 2022. In the case of Texas, an essential supplier of natural gas for Mexico, lawmakers enacted legislation punishing investment and insurance firms that use (ESG) metrics in their decision-making. 

This legislation prohibits state entities, such as public pension funds or state agencies, from doing business with firms that boycott fossil fuels or use ESG criteria to limit investments in the energy sector. Under the law, Texas can divest from blacklisted financial firms that prioritize ESG metrics over fossil fuel investments and may impose fines or other penalties on companies that fail to comply with the state's anti-ESG stance. 

Some corporations and advocacy groups have pushed back against the legislation, arguing that it infringes on their right to make independent business decisions. Private sector firms impacted by this legislation claim that such laws are politically motivated and could harm long-term financial performance by ignoring climate-related risks. However, a significant number of market participants opted to adjust their policies to comply with Texas's legislation, ensuring they remain eligible for state contracts and investments. 

Major financial institutions such as BlackRock, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo, BMO Bank, Citibank, Fifth Third Bank, Northern Trust, TD Bank and HSBC are also under pressure from state governments across the United States, asking them to stop “boycotting fossil fuels.” 

Many of these financial institutions argue that ESG metrics are essential for managing long-term risks, including climate change, and are consistent with their fiduciary duty to clients. Some banks and asset managers have sought to strike a balance by continuing to fund fossil fuel projects while also investing in renewable energy and other sustainable initiatives. For example, JPMorgan and Citibank pledged to align their financing activities with net-zero emissions goals while maintaining support for fossil fuel companies during the transition.

In some cases, firms have withdrawn from high-profile ESG alliances, such as the Net-Zero Banking Alliance, to avoid political backlash or legal risks.

ESG in Mexico 

Mexico faces many environmental challenges, such as high emissions rates and other ecological concerns; however, the country is particularly vulnerable to social risk, issues that directly impact the well-being and stability of its population. These include critical shortages in water access, inadequate healthcare systems, and gaps in educational opportunities. These social risks exacerbate Mexico's overall vulnerability and present more severe challenges compared to many other nations.

Mexico recently updated its climate goals, which were originally set after the Paris Climate Agreement. The country increased its conditional reduction target for greenhouse gas emissions from 22% to 30% and raised its unconditional reduction target from 36% to 40%.

Many major financial institutions and insurance companies in Mexico adopted higher ESG standards. This shift is placing stronger restrictions on financing and ensuring oil and gas-related infrastructure projects, as these industries often conflict with ESG criteria. However, as the political backlash against ESG grows in the United States, companies operating in Mexico are now faced with a complex dilemma: they must carefully evaluate who is more likely to punish them for being pro- or anti-ESG.

This dynamic is particularly interesting because it forces companies to weigh the risks of alienating different stakeholders. On one hand, adopting stricter ESG standards may please global investors, environmentally conscious consumers, and international regulators. On the other hand, abandoning or softening ESG commitments could appease local political actors, pro-fossil fuel industries, and those who view ESG as a form of overreach. The decision is further complicated by the potential market effects of adopting or abandoning ESG principles.

For example, could there be a Mexican oil and gas equivalent to Bud Light's faux pas, where a company's ESG-related decision led to significant consumer backlash and financial losses? Or, conversely, could a company experience a Coca-Cola-style misstep, where failing to align with ESG values resulted in reputational damage and loss of market share? These scenarios highlight the high stakes balancing act that companies must navigate as they reconcile competing pressures from pro- and anti-ESG forces

PEMEX and CFE

An anti-ESG movement could benefit state producer PEMEX and state-run utility CFE, as both companies struggle to meet their own environmental commitments. CFE's current ESG information is very limited. The company constantly fails to provide sufficient information about its efforts and results.

However, the firm Sustainalytics has said that CFE represents a severe ESG risk. Sustainalytics was contracted by CFE to provide an independent opinion of the utility’s sustainability framework as it was preparing for its first sustainable bond sale in February 2022. CFE successfully completed this bond sale and executed several subsequent placements after that. 

Despite this scenario, CFE has made some public efforts to increase its ESG compliance, including getting involved in some of the Mexico federal administration’s social programs, such as increasing internet connectivity in rural and poor areas in Mexico. 

The utility is also leading some of the projects of the so-called Plan Sonora, which will eventually build up to five solar plants in the Mexican state of Sonora. The Plan Sonora is facing criticism mainly due to the lack of proposed transmission projects in the area, unclear delivery dates, unfeasibility of certain parts of the plan and financial concerns. 

PEMEX faces a similar situation. The company is still failing in areas such as gas flaring, and accidents in many of its facilities remain a daily occurrence. However, as the company continues to face a crushing debt burden, it has been trying to elevate its ESG score to attract new financing. 

PEMEX’s recently unveiled sustainability plan prioritizes ESG factors, electric mobility, and green hydrogen projects. The company plans to improve its emissions counting system and engage with international organizations to elevate climate standards. However, implementing such changes will not be easy culturally and will cost money, which PEMEX does not have.