Manuel Rodríguez Arregui
AINDA Energía & Infraestructura
Expert Contributor

Full-Circle ESG Implementation

By Manuel Rodríguez Arregui | Thu, 10/21/2021 - 15:05

When thinking about Environmental, Social and Corporate Governance (ESG), most people in Mexico tend to focus on the environmental and social factors, without considering that taking the spotlight away from governance leaves everything else as no more than good intentions. The “G” in ESG is the foundation to make correct decisions, to manage risks properly, to comply with a code of conduct, to promote diversity, to act with transparency, to be accountable and to generate a culture of sustainability.

Governance works better with a reference that serve as a guide. For fund managers, the best benchmark is the United Nations’ Principles for Responsible Investment (UNPRI). Ainda became the first signatory in Mexico to UNPRI in January 2016 and since then, we have been willing to be evaluated by a third party.

For private equity funds based in Mexico like Ainda, the baseline for governance policies is set by the stock market regulations (Ley del Mercado de Valores), but the possible actions for an integral ESG structure are substantially broader. Ainda has taken the extra steps to obtain a grade of A+ in our assessments. Governance is not only about having independent members in the ultimate decision-making committee of the fund, having external auditors, or reporting to the stock market each quarter. It’s also about having independent members in the governance of the GP, especially in the audit and compensation committees. It’s about having and enforcing a robust code of conduct, a detailed investment process that incorporates ESG with a responsible investment strategy, and an approach to diversity and inclusion and to a favorable working environment.

What we have done to stand out with ESG is reflected in our Sustainability Report. Our ESG framework is supervised by our compliance director periodically and reported to our audit committee to allow for improvement and innovation. We have also enabled an anonymous reporting platform managed by a third party in case there’s a violation of any policy or process, involving all parties in the observance of our governance structure. And last but not least, at Ainda, we have encouraged best practices in terms of ESG observance by constructing an HR performance evaluation system that ultimately incentivizes the team to incorporate ESG throughout the whole investment process and in our day-to-day activities.

Once we had ESG permeated in every level of our organization, it was important not to fall into the deception of considering that environmental and social factors are solely something that goes one way, a list of things which you shall comply with or a list of things that you shall avoid in order to proceed with an investment. When implementing responsible investment, one must consider that rejecting projects because they are politically sensible is not necessarily the best way of making things right. The world needs examples of how to undertake activities like oil and gas, power generation, mining or textile manufacturing in a responsible manner. Mexico and other emerging economies must continue building, for example, new thermoelectric projects. Doing so, implies societal benefits that also need to be considered. Therefore, the responsible decision, instead of avoiding such projects, is to find the way to make the project work, and at the same time, being environmentally accountable and compliant.

For social factors, it’s not only about avoiding activities that negatively impact communities but about how we can be more proactive to involve communities within the scope of the project. And very importantly, we consider that one of the main aspects when analyzing the social factors of any project is to determine whether the proposed deal is convenient for your country. Signing agreements that will not result in a benefit for a government can’t be beneficial for society as a whole and will indirectly cause a social impact or have a social cost. A clear example of this is not considering international accounting standards when signing a contract, such as Public-Private Partnerships, with the government that implies an expensive liability according to International Financial Reporting Standards (IFRS). Likewise, social responsibility starts with the defense of the rule of law. By following the law, and if applicable, file complaints and make use of the rights and remedies of the judicial system, one sets the basis for integral social responsibility.  

Finally, I would like to comment that currently, investors are increasingly calling for high quality, visible, reliable and comparable reporting of ESG considerations by companies. However, the lack of unified measuring criteria is adding an extra administrative burden to the effort. It has become increasingly complex for companies to keep up because each investor has a different questionnaire, even though, in the long run, all of them need similar information. Considering the institutional investor community, my proposal and advice is to encourage comparability around reporting and to encourage more firms to adopt responsible investment guidelines by becoming signatories of UNPRI as a standard or as a baseline, and ultimately agree on the criteria to evaluate adherence to ESG principles.