ESG as a Basis for Sustainable Financial Investment

ESG (environmental, social and governance) criteria are among the most widely used tools by companies around the world to communicate their environmental and social impacts and the way they make decisions within their organizations. 

These criteria initially began to be used by public companies, such as those listed on stock exchanges, as a way to communicate to their investors and other stakeholders the impact of their operations, and thus maintain or improve their financial valuations.  In Mexico, the Mexican Stock Exchange (BMV) has three indexes that track the ESG performance of companies: S&P/BMV Mexico Total ESG Index, S&P/BMV IPC ESG Tilted Index and S&P/BMV IPC CompMx Trailing Income Equities ESG Tilted Index. In 2023, 28 out of the 145 issuers on the BMV, 140 domestic and five foreign, reported having an ESG self-assessment and another 113 had at least one sustainability report. Among these companies, the following stand out for covering the three criteria in their reports and the metrics associated with criteria performance: Grupo Bimbo, Grupo Modelo, Google, BBVA, Nestle, Grupo Herdez, Mercado Libre, Natura, Heineken Mexico and Pfizer.

One factor that has driven the adoption of ESG criteria for BMV issuers is the sustainability-linked bond launched by the BMV. Its main objective is to help companies move toward more sustainable markets. The main characteristic of this bond is that it is not linked to a particular project, but to a sustainability strategy in general and to compliance with the KPIs associated with this strategy, which makes it very attractive for issuing companies. 2023 was a record year for the issuance of this type of bond, as the BMV placed MX$131 billion (US$6.3 billion) to support sustainable strategies, representing 40% of the total bonds placed since its launch in 2016, which indicates a growing interest of companies in this type of financial instrument.

Currently, ESG criteria are being adopted by companies that, although not public, have seen value in the information generated by these criteria in their daily operations and in the continuous improvement of the company; depending on the type of company, its main activity and its particular business model, each of these criteria will have greater relevance or exposure than other criteria. The success in determining which criteria are the most relevant for the organization depends on the materiality or dual materiality analysis performed by the company, which will indicate in which area to implement strategies that reflect a significant impact for the organization and its stakeholders. 

One of the ESG criteria that has seen the greatest growth in Mexico in recent years in terms of its implementation within organizations is the environmental criterion. This is driven by market requirements such as those established by global companies that set up operations in Mexico or seek suppliers that comply with environmental standards, in particular the communication of greenhouse gas (GHG) emissions generated by their operations, such as Scope 1 emissions (direct emissions), Scope 2 (indirect emissions), and Scope 3 (emissions from the value chain). Scope 3 emissions are becoming particularly relevant for companies and their value chain, since it is estimated that 75% of a company's CO2 emissions come from its value chain, hence the importance of identifying precise sources and establishing strategies for their control and mitigation. On the other hand, with the nearshoring or relocation of value chains from the United States, Asia, or the European Union to other countries, including Mexico, the communication of these environmental criteria will become critical for companies that want to integrate into global value chains.

Another factor that is influencing the communication of the environmental criteria of companies is clearly the effect of new policies and regulations at the federal andsState levels, as well as the country's commitment at the international level to contribute to achieving the Sustainable Development Goals (SDGs) and the 2030 Agenda. This can be reflected for example with the laws and carbon taxes that have been enacted in Mexico throughout diverse states such as Durango, State of Mexico, Guanajuato, San Luis Potosi, Tamaulipas, Queretaro, Yucatan and Zacatecas. It is expected that in the midterm other states will enact similar laws aligned with the global trend toward low-carbon economies.

Social and governance criteria are no less important for institutions. In the work carried out by the US-Mexico Foundation for Science (FUMEC) with different types of Mexican companies, the need for professionalization is effectively conveyed through the implementation of corporate governance and best practices that help the organization reduce risks, facilitate transparency and accountability to its stakeholders, define clear operating rules and responsibilities of managers and stakeholders, and finally, access financial sources.

In terms of social criteria, it is also of utmost importance for organizations to be able to evaluate and establish programs and policies that favor both relations with the organization's labor force and relations with the communities where the companies are located.

ESG criteria, while not the perfect tool, can contribute to advancing the sustainability of organizations by focusing on identifying the areas of greatest impact for the organization and implementing associated strategies for continuous improvement.

(In collaboration with César Rivera)