Having an ESG strategy is a way for companies to assess how their business decisions affect the environment and society. Why is it important to generate sustainable businesses? Experts from prestigious firms in the region provide their opinion.
Social need and business opportunity come together to transform the way companies mitigate their impacts, drive performance, and report their results.
The ESG criteria -environmental, social and corporate governance, for its acronym in English- are a non-financial reporting mechanism whose objective is the implementation by companies and institutions of concrete actions that contribute to generating positive social impact in the community. , the environment and its internal government.
An ESG strategy that allows global challenges such as climate change, diversity and inclusion of different groups, sustainable financial management, among others, to be incorporated into the business and, by including them, enables companies to respond to current demands and future of society generating shared value and increasing its competitiveness.
Specialists from prestigious legal firms in the region provide their point of view on the importance of incorporating ESG strategies into business.
According to Florencia Fuentealba, Associate of the Compliance Group at az in Chile , “a company that has adopted ESG measures may have a better reputation than a company that has not done so, as it denotes that there is a concern to mitigate its negative impacts and even more , generate positive impact. Companies with ESG can be more competitive than one that does not, as ESG can increase business sustainability in a period of climate crisis, crisis of confidence, etc, allowing companies to obtain their social license to operate”.
However, the incorporation of ESG strategies has evolved and been refined over time. “Until a few years ago, having an ESG strategy was something voluntary for companies,” says Dorothea Garff, Senior Associate at the firm Beccar Varela of Argentina . “We understand that ESG strategies will become mandatory, because in many countries laws with extra-jurisdictional effects are beginning to be implemented that require compliance with certain standards.”
For Gerson Vaca Abendaño, Partner of Basham, Ringe y Correa de México “if we talk about value, we consider that there are different factors on which it is important to work, prepare and have ESG criteria in a company, which undoubtedly increases the value of this one compared to other companies in similar conditions”. And he describes as values: Understanding and mitigation of ESG and Competitiveness risks.
Impact on stakeholders: relationship with consumers
In recent years we have been able to observe a change in consumer behavior from a more passive role to a more empowered one, whereby they more frequently demand information regarding the products they consume, opting for those that, for example, respect fair trade, responsible value chains, care for the environment and not testing on animals.
“ESG strategies are fundamental in today’s society, without a doubt, they bring strategic and economic value to companies in all industries. A global awareness of the importance of this issue has been created, which arose as a need for a common problem and the issue gained strength with the United Nations resolution regarding the goals set by the countries in the 2030 Agenda,” he explains. Vivian Liberman, partner of the BLP firm in Central America .
Graff thinks along the same lines with his vision of Argentina. “Today consumers of any type of company ask for more explanations about the origin of the product and how it is made. We are increasingly aware of the environmental and social impact that an article can have. The brands that are positioned from the start with this strategy have a great future. But there are also sectors with more risks in environmental and human rights issues that should be dealt with more urgently”.
Investments and capital raising
In the case of investors, their priorities have changed in recent years. The best example of this is the investment fund Blackrock, which has already adopted a sustainability criterion for its investments. Thus, investors currently seek to finance companies that consider social, environmental and governance initiatives in their purpose and objectives, since these appear to be less risky than those in which there is no perspective in this regard.
Investment portfolios based on ESG criteria have proven to have less volatility, generate higher returns and guarantee long-term investment returns, generating sustained and lasting growth. On the other hand, companies that ignore these criteria could present conflicts with the communities, fraud, acts of corruption, financial irregularities and labor conflicts that seriously damage the corporate image and the operation of the business.
For Fuentealba, “when adopting an ESG strategy, it is not enough to make statements only, but as is done with financial factors, companies must incorporate objectives, goals and metrics to evaluate their progress. In my opinion, a good ESG strategy is one that can be measured and audited, as only then can we know if the desired impact is being generated or if the strategy and the chosen path should be reconsidered”.
“Investors consider this issue as a fundamental factor and apply it as part of their strategic analysis in non-financial factors when identifying risk areas and opportunities for economic growth,” agrees the BLP expert. “With this, ESG analysis becomes an important part of the investment process. In addition to contributing as a motivational key in environmental, social development and governance practices that allows a complete analysis to understand the company in which you want to invest or that you intend to hire”.
What an ESG strategy also brings to companies, especially in emerging markets such as Latin America, is a letter of introduction when it comes to generating new business opportunities. “There are companies that require their suppliers from other countries, especially European companies, to comply with certain standards. So for Latin America or particularly Argentina, if a company intends to be a supplier to a European company, it has to seriously consider the implementation of ESG criteria. For example, Germany already has a law in force that makes it mandatory to work on ESG axes”, says Garff.
“Having a good ESG strategy favors the proper functioning of companies, and it is becoming an essential requirement for certain clients or a valuable differentiator from their competition,” says Vaca. And he adds “On the other hand, a correct creation and implementation of an ESG strategy allows the company to better understand its market, its clients and its stakeholders, which gives an opportunity to create new lines of business or adapt existing ones to meet the demand or create new services or products thus generating new business”.
ESG investing is the future of investment strategies, because it helps mitigate risk, generate long-term value, and improve the performance of companies and organizations from different verticals. The most important thing that will continue to happen in 2023 and the years to come is the idea of generating business within a framework of responsibility.