ESG in Latin America and the Rise of the Social Pillar

What is ESG?

Environmental, social and corporate governance (collectively referred to as ESG) is generally used to describe criteria or standards by which companies can be measured with respect to a broad range of socially desirable ends. These data points are then incorporated into the decision-making and risk management process for investors, financial institutions, customers and government agencies or regulators, among others. Each of the three areas of ESG (referred to herein as ‘Pillars’) are defined by different factors. Environmental criteria are used to assess the Environmental Pillar and a company’s impact on the natural environment (e.g., reductions in carbon emissions, use of renewable energy sources, and waste management). The Social Pillar (also referred to as the ‘Stakeholder Pillar’) considers how a company manages its relationships with stakeholders, which includes shareholders, employees, suppliers, customers and the communities within which the company operates. Under the Corporate Governance Pillar, various criteria examine how a company is operated – most notably focusing on the role and composition of executive management or the board of directors, the distribution of rights and responsibilities among directors, shareholders, and other participants in the company, and how these participants interconnect to promote the company’s ongoing success.

The Social Pillar of ESG is often overshadowed by the other two pillars because it is more difficult to define and measure. The Social Pillar has a broad remit, covering how companies manage their relationships with all stakeholders, not just shareholders, as noted above. Because of this coverage, risks under the Social Pillar can affect company performance, growth and reputation. While, for example, environmental matters are particularly significant in certain industries (e.g., oil and mining), the Social Pillar affects every company, regardless of geographical location or sector.

ESG awareness and implementation in Latin America have generally trailed behind when compared to Europe, North America and East Asia. That said, in recent years, the disruption and changes caused by the covid-19 pandemic have helped put social matters top of mind for organisations globally, including in Latin America. Indeed, the Latin American and Caribbean economies have suffered more compared to the rest of the Western world. Almost 45 per cent of jobs in these economies require close physical proximity in contact-intensive sectors (e.g., restaurants, retail stores, and public transportation), compared to around 30 per cent for emerging markets. Furthermore, only around one in five jobs in Latin America and the Caribbean can be performed remotely, which is half of the percentage of advanced economies and below the emerging world average of 26 per cent.[2]

Against this backdrop, we see an increased focus in Latin America on the adoption of ESG practices to help guide corporate decision-making and manage corporate risk, specifically related to how companies impact on their employees and other stakeholders. For example, during the covid-19 pandemic, salary subsidies and loans to support employment and retention became common in Argentina, Brazil, Chile, Colombia, Mexico and Peru, assuming certain criteria were met (e.g., firm size, compensation levels, and financial loss as a result of the covid-19 pandemic).[3]

We have also seen how government regulation has pushed companies towards a greater focus on social issues – one example being the US sanctions on goods connected to Xinjiang, imposed in December 2021. These sanctions prohibit imports from the Xinjiang region of China unless businesses can prove that their goods were produced without the use of forced labour.[4] Though outside Latin America, such regulations are illustrative of a broader shift and increasing emphasis on ESG-related issues, and the Social Pillar in particular. Moreover, such regulation in Asia likely foretells the future for similar issues in Latin America, where awareness and implementation of ESG practices have generally lagged relative to other regions in the world. Put simply, ESG (and specifically the Social Pillar) has the world’s attention and is here to stay, even if different regions are at different phases of implementation.

Unpacking the ‘S’ in ESG

As noted above, the Social Pillar predominantly concerns how a company manages its relationships with stakeholders other than just shareholders. This assessment covers a number of key areas including:

  • employees (e.g., labour rights and conditions, salaries and benefits, diversity and inclusion, workplace harassment and discrimination, health and safety, and whistle-blower protection);
  • suppliers (e.g., corruption and exploitation within supply chains);
  • customers (e.g., product safety and liability, product labelling or selling practices, and data privacy protection); and
  • general stakeholders (e.g., human rights violations, human trafficking, and intrusions on local indigenous groups or other community groups).

The importance of the Social Pillar is increasingly evident through the focus of governments, regulators, consumers, and citizens on one element in particular, the supply chain. Indeed, many jurisdictions, such as the United States, the United Kingdom and the European Union, have introduced a legal framework imposing obligations on companies in relation to the sources of their goods and services and the impact on their supply chains. A key example in recent years is the growth of legislation against modern slavery (i.e., slave-like exploitation, including human trafficking and forced labour).[5] Other aspects of the Social Pillar also include an increased focus on issues around diversity and inclusion, indigenous rights, personal privacy and other social issues – all of which are relevant to a wide range of stakeholders in a globalised world.

For its part, Latin America has not yet established a rigorous legal framework against which social issues can be assessed; however, consequences for non-compliance in this area can still be far-reaching and apply more broadly to a company – even if the conduct is contained within Latin America. In particular, if the underlying concern has any nexus to another country, whether through the organisational structure or location of the principal office, it can result in potentially significant consequences for a company.

Making progress under the Social Pillar can often require significant effort. Nevertheless, the potential impact of failings in this area can be serious. Reputational harm and negative brand publicity can discourage consumers from purchasing goods or services, dissuade investors from providing financing, and even result in stifling business to a halt. Other consequences of non-compliance or ineffective measures include financial risk (e.g., fines and injunctions), legal risk (e.g., employment law and other legal violations) and regulatory risk (e.g., financial criminal offences related to proceeds from illicit activity).

Measuring the Social Pillar

Although there is no global standard against which to measure success in this area, a number of frameworks are nonetheless instructive – including the UN Sustainable Development Goals (UN SDGs), Global Steering Group for Impact Investment (GSG), Global Reporting Initiative (GRI), UN Guiding Principles Reporting Framework, World Benchmarking Alliance, Sustainability Accounting Standards Board, Impact Reporting and the Investment Standards, and World Economic Forum.

The UN SDGs, adopted by all UN Member States in 2015 as part of the 2030 Agenda for Sustainable Development, contain 17 sustainable development goals aimed at tackling systemic global economic, social, and environmental challenges.[6] Of particular relevance to the Social Pillar are:

  • UN SDG 4: Quality Education (e.g., providing training opportunities to employees, including women, to help increase the number of adults who have technical and vocational skills);
  • UN SDG 5: Gender Equality (e.g., implementing policies to end all forms of discrimination against women within the company, ensuring women have full and effective participation and equal opportunities for leadership at all levels of company decision-making);
  • UN SDG 8: Decent Work and Economic Growth (e.g., promoting decent job creation, providing equal pay for work of equal value, taking immediate and effective measures to eradicate forced labour and end modern slavery within company operations and supply chains, securing the elimination of child labour from business activities and supply chains, protecting the labour rights of workers, and promoting safe working environments for all workers including migrant workers);
  • UN SDG 10: Reducing Inequality (e.g., ensuring equal opportunities in company recruitment and promotion criteria or processes, implementing non-discrimination policies and reporting procedures, and providing training on discrimination including unconscious bias); and
  • UN SDG 16: Peace, Justice and Strong Institutions (e.g., considering human rights violations, exploitation, and trafficking in compliance risk assessments).

In 2019, the World Economic Forum’s International Business Council (IBC) flagged the lack of consistency and comparability of metrics, arising from the existence of multiple ESG reporting frameworks, as preventing companies from credibly demonstrating their progress on sustainability and their contributions to the UN SDGs to all of their stakeholders.[7] Consequently, the IBC invited the World Economic Forum, in partnership with Deloitte, EY, KPMG and PwC, to coordinate a set of universal ESG metrics and recommended disclosures that could be consistently reflected in a company’s annual report. This process culminated in a set of 21 ‘core metrics’ and 34 ‘expanded metrics’ related to ESG.

The core metrics comprise more established quantitative metrics that are likely already being recorded by companies (e.g., employee diversity statistics) or metrics that can be calculated based on readily available information (e.g., pay equality ratios through comparative compensation analysis for each employee category taking into account gender and ethnic considerations). The expanded metrics are a combination of more advanced metrics and disclosures which are less likely to be found in existing practice and standards. These include the number of discrimination and harassment incidents within a company, the status of the incidents and actions taken, and the total amount of monetary losses as a result of any related legal proceedings.

The Social Pillar in Latin America

We have seen a few examples of how the increased focus on the Social Pillar in Latin America has worked in practice – examples that also underscore how these issues can have a real impact on businesses operating in the region.

One example highlights a focus on supply chain issues – specifically, Olam International is facing an enforcement action by Brazilian prosecutors for allegedly failing to address child and slave labour abuses in its supply chain.[8] Brazilian prosecutors filed the lawsuit against the cocoa processor in January 2021 and are seeking around 300 million reais (approximately US$58 million) in damages. In another example, over 200,000 Brazilian claimants (comprising individuals, businesses and municipal governments) affected by the devastation of the collapse of the Fundão dam in 2015 launched proceedings in the United Kingdom against the English ultimate parent company of the Brazilian dam operator.[9] This case is one of the latest in a trend by which English courts have shown their openness to consider claims of alleged violations of business and human rights abroad.

Of course, company strategy does not operate in a vacuum and so any decisions are necessarily influenced by the local economy and political landscape, as well as pressure from the media and other organisations. The unique circumstances of different Latin American countries across these factors means that any individual company’s approach to the Social Pillar, including the practical steps that can be taken to mitigate risks under the Pillar, must be tailored with that context in mind. Nonetheless, as these examples illustrate, multinational companies operating in Latin America should remain vigilant as to the possibility of labour and human rights violations (among other areas covered by the Social Pillar) that could affect other parts of its corporate brand and structure.

Relevant social legal frameworks in Latin America

Governments of Latin American countries are at different stages of implementing legal frameworks on social issues. In addition to governmental regulation, a number of private companies and non-government bodies have created voluntary initiatives along these lines. For example, some Latin American countries are members of GSG. Established in 2015, GSG is dedicated to impact on investment and entrepreneurship to benefit people and the environment. It currently covers 33 countries through 28 National and Regional Advisory Boards, including Central America and Latin American countries (including Argentina, Brazil, Chile, Colombia, Mexico and Uruguay). The Regional Advisory Boards promote and facilitate the development of impact investment in the countries in which they operate. GSG encourages the incorporation of ESG factors into decision-making or reporting activities, even when not required by local legislation. GSG also encourages taking positive steps to combat social issues (e.g., pledging to end forced labour and cutting ties with businesses profiting from slavery, including marginalised groups and victims of conflict in employment).

In addition, a number of private companies in the region participate in the UN Global Compact, a non-binding UN pact calling for private businesses worldwide to respect labour rights, the environment, and human rights by adopting sustainable and socially responsible policies.

CountriesMember of GSGNumber of companies participating in UN Global Compact[10]
ArgentinaY411
BrazilY1,525
ChileY117
ColombiaY597
Costa RicaN37
MexicoY883
PeruN87

Brazil

Brazil has an established legal framework for employment and labour rights at both a national and federal level. Specifically, Brazilian Law (Law No. 13,146/2015) sets quotas for the employment of disabled persons depending on the size of the organisation. In addition, Brazilian Law (Law No. 7,716/1989) criminalises situations where employment is denied or impeded by a private company based on race, ethnicity, religion or national origin. Finally, Brazilian Law (Law No. 14,133/2021) prohibits companies that have been legally convicted for the exploitation of child labour or the submission of workers to conditions analogous to slavery from participating in bidding processes.

In general, there is no unified standard with respect to upholding human rights in companies in Brazil. The November 2018 National Guidelines for Business and Human Rights (Decree No. 9,571/2018) detail the concepts in the UN Guiding Principles on Business and Human Rights for companies operating in Brazil. Although there is no express legal obligation to present reports or disclosures relating to human rights issues, companies in certain sectors, such as the mining industry, are subject to disclosure requirements for violations in these areas. In addition, although there is no legal obligation to conduct due diligence related to human rights matters, some Brazilian companies have done so anyway (for example, in the context of an M&A transaction or to monitor the supply chain).

As a private sector initiative, the Brazilian Business Council for Sustainable Development (CEBDS) is a non-profit civil association that brings Brazilian organisations together to implement sustainable business practices – including providing employees with human rights awareness training, establishing diversity and inclusion committees to develop inclusive strategies, and encouraging support networks (e.g., for LGBTQ+ employees).[11]

Since 2004, Brazil has maintained a ‘dirty list’ of employers, made up of companies and individuals who have been found guilty of using slave labour. Although there is currently no legal punishment for a company or individual who is on this list, those featured are barred from receiving public financing and have limited access to private loans.

Chile

Since becoming the first Latin American country to launch the UN Global Impact in October 2001,[12] Chile has continued to put social issues at the forefront of companies’ agendas. In 2017, the Chilean government published its first National Action Plan (NAP) on Business and Human Rights (2017–2019).[13] The NAP sets out 158 action points for specific government institutions based on stakeholder recommendations and other relevant agendas, including the UN 2030 Sustainable Agenda and UN SDGs.

Recently, the Financial Market Commission (CMF), the Chilean financial regulator, issued secondary legislation, General Rule No. 461, in November 2021, which amends the structure and content of annual reports of certain organisations, including banks, insurers, issuers of publicly offered securities and general fund managers.[14] General Rule No. 461 specifically sets out the obligation to report on ESG factors, such as information on people who provide services to the company, including aspects of diversity, pay gaps, occupational safety, and workplace harassment and discrimination.

Although there is no single government body dedicated to promoting ESG in Chile, there are a number of public agencies that have implemented initiatives to promote sustainability and responsible investment practices.[15] For example, the CMF is currently working on an amendment of the new reporting obligations under NCG 386 aimed at strengthening the adoption of ESG principles.

Colombia

Colombia published its first National Action Plan (NAP) on Business and Human Rights (2015–2018) in December 2015, and its second edition (2020–2022) in December 2020, which captured covid-19 considerations. The second NAP serves as a tool for companies, regardless of size or sector, to promote, protect, and repair the human rights of workers and families affected by decreased income and suspended employment contracts, among other negative impacts of the covid-19 pandemic.[16]

An online platform, the SDG Corporate Tracker Colombia, assists companies in assessing their contribution towards achieving the UN SDGs.[17] The initiative is supported by the GRI, the National Planning Department of Colombia, and the UN Development Programme. Over 400 companies have registered on the platform. The tracker assists with the information collection process as well as reporting and analysis of ESG performance against GRI standards related to (1) employment rights and labour conditions;[18] (2) community interests;[19] (3) supply chain risks;[20] and (4) customer welfare.[21]

Mexico

Mexico’s Constitution sets out a general framework on human rights, child labour and slavery issues, implemented at both the national and the federal level. Relevant legislation includes the State Trafficking in Persons Law prohibiting forced labour; the Federal Labour Law concerning working conditions and employment issues, including striking and unionisation; and the Federal Regulations on Health and Safety at Work, which sets minimum standards of environmental, health and safety conditions in the workplace.[22],[23]

In 2020, the Mexican government published a National Human Rights Programme 2020–2024, which includes a section dedicated to business and human rights.[24] This followed an attempt to develop a specific Human Rights and Business Programme (2015–2018) to promote greater respect for human rights in business activities.[25] In its third UN Voluntary National Review in 2021, the Mexican government underscored a continued commitment to correct historical social debts by implementing measures focused on closing inequality gaps, eradicating poverty, and ending corruption, among other topics.[26]

In Mexico, like in Colombia, progress in these areas and towards achieving other UN SDGs is being tracked via an online platform, which was launched in 2018.[27] The platform, titled ‘Information System of Sustainable Development Goals (SIODS)’, provides a centralised location for data from various Mexican governmental departments and agencies.[28] It also allows users to track indicator data and targets related to the UN SDGs at a provincial level, and compare them against the national average collected by the government.

Peru

In 2018, Peru adopted its third National Human Rights Plan (PNDH) 2018–2021, setting forth five strategic alignments that correspond to the UN SDGs. The fifth strategic alignment highlights the duty of private and public companies to progressively implement international human rights standards.[29] Following the Organisation for Economic Co-operation and Development (OECD) Responsible Business Conduct Policy Review on Peru in 2020,[30] the Peruvian government published a National Action Plan (NAP) on Business and Human Rights (2021–2025) in 2021.[31] The NAP contains recommendations for companies to strengthen measures across a range of issues, including forced labour and child labour within supply chains, employment rights and non-discrimination.

Practical considerations

Companies assessing performance under the Social Pillar should consider the key risks that could exist across the following categories.

Employees

Issues to consider here could include the risk of undocumented remuneration; underage workers or children; workers seemingly working without any formal employment contracts in place; employees working long hours without breaks; underpayment or deductions from salaries (e.g., to repay loans); the presence of hazardous materials, dangerous working conditions or a lack of necessary safety equipment; and a general lack of safeguarding policies and training and reporting procedures in place to protect workers (e.g., health and safety policies and incident logs, harassment or discrimination reporting and disciplinary procedures, whistleblower channels and protections, and employee data privacy policies).

Suppliers

In terms of suppliers, companies are increasingly requiring suppliers to have the same safeguarding policies, training and checks in place as are applied to their own businesses. Supply chain audit rights are increasingly utilised as a way to confirm that suppliers adhere to the agreed standards (e.g., organising a periodic inspection of a farm or factory to assess working conditions).

Customers and the community

Related to customers and the community, companies should consider (among other areas) product quality, safety and general fitness for purpose; the manner in which products are labelled, advertised, or otherwise marketed to consumers (e.g., the accuracy or fairness of the product labelling or description, the tone of the marketing materials and advertisements, and the intended audience of the marketing approach); how the company or company website collects and manages personal data from the individuals who interact with it; and general customer and community engagement (e.g., review processes, complaint handling procedures, and participation in wider community events).

Conclusion

ESG has captured the world’s attention, and the ‘S’ in particular has increasingly become a focus for a variety of stakeholders. Given the breadth of this pillar’s application, and its significance for companies, tackling and managing the Social Pillar is an involved task. Nonetheless, companies that have taken action to pre-emptively mitigate risk in these areas enjoy an increasing competitive advantage as governments begin imposing requirements on managing and measuring compliance on social issues.

Given these trends, companies in Latin America should start actively assessing the risks and consider what proactive risk mitigation measures can be implemented now as part of the company’s broader compliance programme and environment. It is just a matter of time before local law and private initiatives in Latin America start to close the gaps and render serious consequences for non-compliance. While it may be difficult to gain traction in these areas, particularly given the ongoing challenges posed by the covid-19 pandemic, companies that choose to be more forward-leaning when it comes to ESG compliance will be well served in the long run.


Footnotes

[1] Ruti Smithline, Hayley Ichilcik and James M Koukios are partners, and Stephanie Pong and Lauren Navarro are associates at Morrison & Foerster LLP. The authors would like to thank Georgia-Louise Kinsella, a trainee solicitor in the firm’s London office, for her contributions to this chapter.

[2] Samuel Pienknagura, Jorge Roldós and Alejandro Werner, ‘Pandemic Persistence Clouds Latin America and Caribbean Recovery’, IMF Blog, October 2020, https://blogs.imf.org/2020/10/22/pandemic-persistence-clouds-latin-america-and-caribbean-recovery.

[3] International Monetary Fund, ‘Latin American Labor Markets during COVID-19’, October 2020, https://www.imf.org/en/Publications/REO/WH/Issues/2020/10/13/regional-economic-outlook-western-hemisphere.

[4] Aamer Madhani, ‘U.S. imposes sanctions on China over human rights abuses of Uighurs’, PBSO News Hour, December 2021 https://www.pbs.org/newshour/world/u-s-imposes-sanctions-on-china-over-human-rights-abuses-of-uighurs.

[5] Arathi Sethumadhavan, ‘How to Stop Modern Slavery’, World Economic Forum, January 2021, https://www.weforum.org/agenda/2021/01/how-to-stop-modern-slavery.

[6] United Nations, ‘Transforming our world: the 2030 Agenda for Sustainable Development’, August 2015, https://sdgs.un.org/2030agenda.

[7] Deloitte, EY, KPMG, PwC and World Economic Forum, ‘Measuring Stakeholder Capitalism Towards Common Metrics and Consistent Reporting of Sustainable Value Creation’, September 2020, https://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf.

[8] Fabio Teixeira, ‘Olam International is being sued by Brazilian prosecutors for allegedly failing to address labor abuses in its supply chain’, Thomas Reuters Foundation News, August 2021, https://news.trust.org/item/20210812130016-jf5im.

[9] Jason Allen, ‘Case Note: Município de Mariana & Ors v BHP Group plc, BHP Billiton plc and BHP Group Ltd: [2020] EWHC 2930 (TCC)’, Blackstone Chambers, February 2021, https://www.blackstonechambers.com/news/case-note-munic%C3%ADpio-de-mariana-ors-v-bhp-group-plc-bhp-billiton-plc-and-bhp-group-ltd.

[10] As at 18 February 2022.

[11] CEBDS, ‘Breaking down walls and building bridges: diversity, inclusion and equity’, June 2019, https://cebds.org/publicacoes/quebrando-muros-e-construindo-pontes-diversidade-inclusao-e-equidade/#.YhyjdavP1aQ.

[12] UN News, ‘Chile first in Latin America to launch Global Compact, UN agency reports’, https://news.un.org/en/story/2001/10/17022-chile-first-latin-america-launch-global-compact-un-agency-reports.

[14] Comisión Para El Mercado Financiero, ‘CMF issues regulation incorporating sustainability and corporate governance requirements in Annual Reports’, November 2021, https://www.cmfchile.cl/portal/principal/613/w3-article-49809.html.

[15] Cristián Eyzaguirre, Francisco Guzmán, and Benjamín Sáa, ‘Getting The Deal Through, ESG and Impact Investing 2021, Chile’, 2021, Carey, https://www.bloomberglaw.com/product/blaw/document/28219833896.

[18] e.g., GRI 401: Employment, GRI 403: Occupational Health and Safety, GRI 404: Training and Education, GRI 405: Diversity and Equal Opportunity, GRI 406: Non-discrimination, GRI 407: Freedom of Association and Collective Bargaining, GRI 408: Child Labour, GRI 409: Forced or Compulsory Labour.

[19] e.g., GRI 411: Rights of Indigenous Peoples, GRI 413: Local Communities.

[20] e.g., GRI 414: Supplier Social Assessment.

[21] e.g., GRI 416: Customer Health and Safety, GRI 417: Marketing and Labelling, GRI 418: Customer Privacy.

[22] Carlos Escoto, Mariana Herrero, Marianela Romero Aceves, Lorena Kiehnle Barocio, ‘Mexico: Environmental, Social & Governance Law 2022’, ICLG.com, December 2021, https://iclg.com/practice-areas/environmental-social-and-governance-law/mexico.

[23] US Department of Labor, ‘Child Labor and Forced Labor Reports: Mexico’, December 2020, https://www.dol.gov/agencies/ilab/resources/reports/child-labor/mexico.

[25] Government of Mexico, ‘Addressing Human Rights in All Spaces and Environments: Working Group on Business and #DDHH’, March 2017, https://www.gob.mx/segob/articulos/abordar-los-derechos-humanos-en-todos-los-espacios-y-entornos-grupo-de-trabajo-sobre-empresas-y-ddhh?idiom=es.

[26] Mexico Voluntary National Review, 2021, InfNalVol_FPAN_DS_2021_es.pdf (agenda2030.mx).

[27] International Institute for Sustainable Development SDG Knowledge Hub, ‘Mexico’s SDG Portal Brings Functionality to Reporting’, August 2018, https://sdg.iisd.org/news/mexicos-sdg-portal-brings-functionality-to-reporting.

[28] Information System of Sustainable Development Goals, https://www.agenda2030.mx/#/home.

[30] Organisation for Economic Co-operation and Development, ‘OECD Responsible Business Conduct Policy Reviews: Peru’, 2020, https://www.oecd.org/daf/inv/mne/oecdresponsiblebusinessconductpolicyreviewsonperu.htm.

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