‘Something there is that doesn’t love a wall’ -– Robert Frost
If good fences make good neighbours, as Robert Frost’s verse has it, what about a 2,000-mile wall?
As the US government went into shutdown in January over funding for President Trump’s infamous border wall with Mexico, more fruitful things were taking place on the southern side of the border.
The Central Banks and Supervisors Network for Greening the Financial System (NGFS) was about to hold a steering committee meeting in Mexico City, hosted by Banco de Mexico, one of its eight founding members.
On January 22, Alejandro Díaz de León, the Governor of Banco de Mexico, told NGFS leaders:
“Sound credit and project financing cannot neglect the associated climate risks it entails. Considering both climate risks and opportunities will certainly help to prevent and mitigate losses in the financial sector.”
Díaz de León also offered an example of what happens when climate-related risks are ignored. “Just consider that Pacific Gas and Electric (PG&E), the California utility company, is expected to enter bankruptcy to manage $30bn of liabilities that accumulated from the devastating wildfires in northern California in 2017 and 2018.”
The NGFS event was part of a two-day Pan-American Green Finance Seminar with other supervisors from the continent, convened by Rafael del Villar, the Chief Advisor to Díaz de León.
As uncollected rubbish was piling up in Washington DC, its southern neighbour was a locus of sustainable finance.
In attendance were representatives of some key organisations involved in this agenda, from The City of London’s Green Finance Initiative’s Sir Roger Gifford, and China’s “Mr Green” economist, Ma Jun, to California’s former Insurance Commissioner, Dave Jones.
The European Commission was also represented by Policy Advisor Maarten Vleeschhouwer to discuss the implementation of the EU Sustainable Finance Action Plan.
Eduardo Atehortua, Head of Latin America for the Principles for Responsible Investment (PRI), participated in the event. Asked whether a Mark Carney figure could emerge in Latin America, he points to Rafael del Villar.
“He knocked on the door of Latin American central banks and supervisors to organise this seminar and convened them to discuss this agenda. He’s been a driving force,” he tells RI.
Atehortua, who started his role less than one year ago, is focusing on Mexico, Colombia, Peru and Chile (the PRIhas now a separate Head for Brazil’s 49 signatories).
Of the four countries, Mexico is clearly the most advanced, he says, “although there is still a long way to go, as the market lacks enough ESG products but there is interest and appetite for this agenda.”
There are two indicators that show this interest. First, despite capital markets not being particularly big in Mexico, comparatively, they are more dynamic than their peers in the region. As such, a number of infrastructure projects have turned to the capital markets in search of funding from institutional investors and other players.
Second, of the 20 signatories of Spanish-speaking Latin America (one in Uruguay, two in Argentina, four in Chile, two in Peru and three in Colombia) eight come from Mexico.
Notably, two large pension funds are signatories, which in Mexico are known as Afores (Administradoras de Fondos para el Retiro or Retirement Fund Administrators).
One is the Afore of Grupo Financiero Banorte, known as Afore XXI Banorte, the largest in the country with $39.9bn in assets (MXN780bn, €35.6bn). Some time ago the Afore, which is 51% state owned, took over the management of all public employees’ pensions and benefits (the Institute for Social Security and Services for State Workers or ISSTE).
It also runs third-pillar schemes and the pensions of private sector employees (workers contributing to the Mexican Social Security Institute or IMSS). The other PRIsignatory is BBVA Bancomer.
“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.”
Atehortua says that another two big Afores, Citibanamex (the second biggest with $30bn AUM) and Profuturo (the fourth with $24.8bn), could soon be joining PRI.
The third largest Mexican Afore belongs to insurance group Sura, which has operations across Latin America with headquarters in Colombia.
Atehortua, who is based out of Medellín, says the PRI is in talks with Sura, as its addition in Colombia could open the door for Sura’s operations in other countries to join the PRI too, including Mexico.
The role of Afores, Fibras and CKDs
According to Alba Aguilar, New Markets Director of MexiCO2, the Afores are well positioned to make the sustainable investment push.
MexiCO2 is a climate change subsidiary of the Mexican Stock Exchange, the Grupo Bolsa Mexicana de Valores (Grupo BMV),
It was tasked with forming a Consultative Committee on Green Finance (CCGF), which was launched in November 2016 under the auspices of Grupo BMV and the Climate Bonds Initiative.
It has representatives from the whole financial chain and their respective associations: banks, insurers, asset managers, development banks, etc.
It is led by a collegiate presidency, held so far by the heads of the three largest Afores. Currently, the two co-presidents are the CEO of Afore Citibanamex, Luis Sayeg, and the CEO of Afore Sura, Enrique Solórzano.
In December last year, the committee signed a cooperation agreement with London’s Green Finance Initiative aimed at sharing best practices and expertise.
At the same time, it launched a statement signed by 51 institutional investors who committed to integrating ESGfactors in their investment decisions, for which they called on market participants to disclose such information.
“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,” Aguilar tells RI.
Aguilar and Atehortua mention another important development: the guidance issued by the Afores’ regulator, Comisión Nacional del Sistema de Ahorro para el Retiro (Consar, the National Retirement Savings Commission).
Consar says ESG factors “can be” taken into account by the Afores.
Aguilar says this is a much stronger signal for the market. “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.”
Atehortua says Consar will likely change such a voluntary approach in the future. “But in the meantime, Consar has made it clear that considering ESG factors is consistent with investors’ fiduciary duties. Investors who think otherwise, will now lose the argument.”
Despite the scarcity of ESG products in the market, and beyond the green bond issuance of the last four years, Aguilar highlights two home-grown financial products with sustainable potential.
These are the Fideicomisos de Infraestructura y Bienes Raíces (Fibras) and the Certificados de Capital de Desarrollo (CKDs).
The Fibras are investment trusts used to develop real estate projects that raise capital from investors through tradeable certificates on the stock exchange. CKDs, a similar vehicle, are typically used for long-term projects such as infrastructure or mining.
Aguilar says Fibras and CKDs could be labelled, from green to brown, depending on the underlying project. “These certificates could differentiate themselves from the brown offering in the market if, for example, they are linked to renewable energy or clean transport projects.”
There are already two CKDs that signed up to the PRI: Ainda Energía & Infraestructura and CKD Infraestructura México.
Mariuz Calvet, Director of Sustainability and Responsible Investment at Grupo Financiero Banorte, owner of Afore XXI Banorte, tells RI that one of the main obstacles is the lack of ESG disclosure by companies.
Apart from a selected number of issuers that are constituents of some sustainability indexes, she says, the rest “don’t disclose, don’t measure and don’t manage ESG information”.
Calvet says the Afore is planning to set up a data system for 2019 combining two elements. The first will be information from a global ESG data and rating firm, which, in a Mexican context, which will probably be more limited than in other markets.
Second, to fill the information gap, it will start engaging companies to ask for the missing information that those firms can’t provide.
“As we are the biggest Afore in Mexico, we hope that companies will start to realise that reporting and disclosure expectations are raising,” she says.
Once this data system is in place, Calvet says, the intention is that the Afore’s Investment Committee will increase its ESG decision-making.
A small team of ESG analysis has been set up led by Gabriela Luna. According to Luna, approximately 24% of the Afore’s total assets have been so far ESG-assessed.
When it comes to corporate governance and stewardship, Mexico faces a number of challenges, according to Mike Lubrano, Co-founder and Managing Director for Corporate Governance and Sustainability at Cartica Management.
Cartica is an emerging markets listed equity fund manager, with a very concentrated portfolio of about 20 companies in 10 countries.
Cartica approaches sustainable investment via the “G” of ESG — active ownership. In Mexico Cartica is a shareholder of Banregio, the regional bank, and of Alsea, a restaurant operator managing brands such as Domino’s Pizza and Starbucks.
As a former securities lawyer practicing in Mexico, Lubrano knows the market well. He tells RI that one of the challenges is that institutional investors do not take common action on governance issues.
“Much of the dialogue in corporate governance was captured early on by the equivalent of the [US] Chamber of Commerce, the Consejo Coordinador Empresarial. The institutional investors’ base is small. The biggest part is the Afores, but they belong to the financial groups, which prefer that investors don’t have too much power.”
Lubrano says he has found no allies among the Afores when promoting some of Cartica’s governance reforms in Mexico.
The most important reform relates to minority shareholders’ rights, which in Mexico is critical as most of the companies are family controlled.
According to Lubrano, company law was amended years ago to allow minority shareholders, with 10% of shares, to elect a board director.
Companies, however, have circumvented this with charter provisions that prevent shareholders from owning such a percentage of shares.
“We believe that’s an illegal provision. The companies and the lawyers are trying to undermine the few rights that are left for minority shareholders.”
Lubrano says Cartica is seeking a ruling from the regulators to rule out this practice. “I can try to sue in court but I was a lawyer in Mexico when I was younger. I know I’ll be retired by the time we reach a final decision.”
Lubrano observes that the new government can bring change, having won on a ticket of ambitious environmental protection and workers’ rights. “How they manage to work it out is going to be interesting,” he says.
The new president, Andrés Manuel López Obrador, better known as AMLO, will face great challenges to keep his side of the wall greener. A more robust sustainable finance system could help him in this endeavour.