Female Speaker: You're listening to the Economics and Country Risk Podcasts from S&P Global. In each episode, our experts will provide you with a clear 360 degree perspective on what's happening around the world.

Alexia Ash: Hi, I'm Alexia Ash and the Director of Risk Quantification on the S&P Global Economics and Country Risk Team. Today we're focusing on ESG or Environmental Social and Governance concerns, which have become really important to investors and operators globally in the last few years. This started with a focus on these factors as the impacted operations at the corporate level but increasingly investors are considering the sovereign level as well.

In fact S&P Global launches a sovereign ESG index just last year, which gives a quantitative picture of the country level risk to sit alongside our company level analysis. However, though the term is only 15 years old, ESG is not new to those of us who are focused on country risk, environmental regulations, social stability and the provisions of government are key in the understanding of risk on the ground and nowhere is that more true than in Latin America.

So today that's where we're going to focus. I'm joined today by three Latin America experts from the S&P Global Country Risk Team. We have Elsa Rejalus [Phonetic], who will be taking a perspective on the wider ESG and its impact on Latin America. Johanna Marris [Phonetic] is going to then zoom in on Mexico and finally Carla Selmon [Phonetic] is going to give us a perspective on Chile.

So first I'm going to let each of our three experts gives a – an overview of what they're seeing in the countries they cover. And then we're going to look at some consistent themes that we're seeing between these geographies. So with that Elsa, can I first turn to you?

Elsa Rejalus: Sure. Hi, Alexia, thanks for having me. As you mentioned, we are seeing a growing interest in ESG coming from investors and shareholders. It’s also coming from activists and consumers and it is likely to affect companies were operating in Latin America. It's premierly because Latin America has such a wealth of natural resources that this has made it a focal point from environmental activism and in particular this is centered around the Amazon region.

An example of this came in August last year when two NGO's called Amazon watch and Stand Up, published a report which highlighted the environmental damage that has resulted from oil spills and contamination, and also highlighted the roles of international banks in financing the oil industry. Then in January this year, we saw three major banks commit to withdrawing financing of the trading crude oil from the Ecuadorian Amazon. Now, this is obviously just one example but there are a growing number of organizations who are dedicated to documenting environmental damage and advocating for change.

And thanks to social media, they also have a growing audience. So with this growing awareness and interest, the pressure on companies are starting to come from different places. And now we're also seeing pressure from political leaders who are keen to demonstrate green credentials or in some cases to fulfill campaign promises, and these leaders and now also pushing for increased regulation, in particular in the EU and in the US.

In fact, several EU leaders including French president, Emmanuel Macron have raised concerns about deforestation in the Amazon. And in January this year, Macron argued that France should stop importing Brazilian soy products in order to avoid financing deforestation. And during the US presidential campaign, President Biden suggested in a debate that he would offer Bolsonario 20 billion US dollar to hold time as in deforestation. President Bolsonario are rejected this offer asserting Brazil sovereignty over the Brazilian Amazon because he argued that exploitation of the country's natural resources is actually key to Brazil's economic development.

But despite Bolsonario statements was still seeing growing pressure from investors and shareholders on companies to demonstrate the best supply chains are deforestation free, and various fashion brands and retailers have either enacted or threatened boycotts of Brazilian beef and leather products due to their links to deforestation. And this really serves to highlight the conflict between what investors are increasingly requiring from companies, in terms of demonstrating the sustainable and deforestation free supply chains.

And the lack of enforcement of regulations in the countries west applies operated. And this puts a lot of onus on companies to impose that own regulations to ensure sustainability, which in turn increases both reputational risk and potentially operating costs as companies need to find ways to effectively monitor and adapt their own supply chains. I think though it's important to note that pressure on companies is also coming from within Latin America.

We've seen a real surge in anti-extractive assentiment in the region, and communities and mounting opposition to projects that they deem to be environmentally harmful. And this is particularly affected mining and agribusiness sectors. But there are also mounting opposition against projects that – their view is encroaching on traditional or ancestral lands. And with international regulations governing environmental standards becoming more stringent, communities are using these to seek legal routes internationally to challenge projects. And this month, 11 indigenous communities in Brazil and Colombia used a 2017 French law requiring the companies ensure supply chains are free of human rights to environmental abuses in order to sue a major French retailer in French court.

And the communities claimed that the retailer was contributing to land seizures and deforestation in the Amazon and was therefore committing both human rights abuses and environmental damage. The communities were backed by US and French NGOs, and are demanding $3.7 million dollars in damages even though the company is claiming that they have strict controls in place in order to ensure deforestation and environmentally sustainable supply chains. This case raises risks for companies that new regulations being introduced in the EU or in the US will provide different routes for communities to seek redress against companies linked to environmental damage.

This is therefore likely to lead to increase project delays and potentially higher penalties for failure to comply with regulations. My final point though is that extractive and agriculture still make up a significant portion of many Latin American countries exports For example in Ecuador Venezuela and Colombia exports from these sectors constitute over 55% of each country's total exports. This means that many countries will struggle to fund a swift transition to a more green economy, especially in those countries where leaders have been unwilling to work towards improved environmental standards and regulations.

So if withdrawals of financing investment continue or there are frequent delays stalling projects, the result will be a decrease in revenue from these key sectors and this will ultimately jeopardize economic development in the region.

Alexia Ash: Thanks Elsa. That's so interesting especially when you're talking about the different kinds of pressure between on the one hand the international pressure because of course the companies we're talking about here are multinationals a lot of the time, but also the pressure on the ground and how those two are being used together in a really interesting way enhancing how civil society is having an impact. So with that I think we can move on to probably the ugliest case we're going to talk today from an ESG perspective if I can be so bold to say that. So Johanna, do you want to talk about how Mexico is doing in this space?

Johanna Marris. Sure. Yes. It's an interesting case. The current Mexican government has he has shown awareness of and has acknowledged environmental concerns particularly water shortages and pollution when raised by local communities. And we've seen this happening in the last couple of years across different sectors mining, food and drinks manufacturing for example. However, like Brazil like, we were hearing it has strongly rejected what it perceives to be outside interference in the role these issues should play in government policy.

So it has been resistant to calls from other governments and private companies based overseas as well for the ways in which it deals with these issues. This is particularly true in the energy sector where the government has emphasized its own sovereignty over its national resources and has sought a greater role consistently for state owned companies in oil and electricity particularly prioritizing their market participation over private companies.

And wind and solar producers in particular have been very heavily affected by government efforts to restrict their operations. The government sees them in direct competition with state owned company produced electricity. And then recently improved electricity reform just a couple of weeks ago gave priority explicitly to state produced fossil fuel generated electricity over clean wind and solar energy for supplying the national grid. As a result of these measures, Mexico is now likely to fall short of its 35% clean energy target by 2024 under the Paris agreement.

And all right, S&P Global, Para-renewables Analysts think that it will probably be nearer to about 30%, so 5% show on what it had agreed for 2024. The high levels of legal uncertainty as well for renewable energy generation in particular are already deterring investment in this sector in Mexico. We've still got a few projects coming online this year but from 2022 we expect, got to really slow down and there'll be very few new projects for the remainder of the current government terms, so that's up to the end of 2024, and potentially longer in the event of another government under the current ruling party MORENA.

The government's lack of support for clean energy and generation and for adherence to international agreements in this area is also likely to impact Mexico's attractiveness for investment in other sectors, and as we look towards the future particularly specifically because sustainability is becoming an increasingly important effect for international investors.

Alexia Ash: Thanks, Johanna. And that must be such an interesting thing to be considering right now with so many companies considering investment in Mexico as an alternative to other manufacturing centers especially in Asia. So there's an interesting kind of push pull there from the government. Did you want to say something about that before I moved on?

Johanna Marris: Yes. And I was just going to say, it's a really interesting one to look up because there's a lot of factors obviously for and against that and it's worth definitely looking into the policies and different areas and for different sectors specifically to see what those are like, because as I've said energy and electricity has been particularly negatively affected under this government but there are others where, where conditions are potentially a bit better, so, yes, its complex.

Alexia Ash: Yes. It's such a good point actually. Sometimes giving not only that country level look but getting into really the sector specificity is where we see the most interesting results or the most interesting trajectories that we can kind of follow to understand how a country is shaping up and what its strategy is, so it’s a really good point. With that, we're not only going to focus on gloom and doom today. Carla, do you want to give us an idea of probably the brightest spot in Latin America which is of course Chile?

Carla Selmon: Thank you, Alexia. Chile is quite advanced in the development of renewables. It has a lot of potential particularly on wind and solar power. And this government and past government and most likely future governments will continue to promote this. So this has led to a quite fast development of renewable, and actually Chile's power market now is oversupplied. Chile already met its targets of having 20% of its energy matrix from renewables by 2025. So I think that partly as a way to take advantage of this, the government has launched quite an ambitious green hydrogen strategy, because this type of technology uses renewable energy. That's why it's called green hydrogen to break the water molecule in a process that's called electrolysis together the hydrogen.

So the government's strategy has three main objectives. First of all to have five gigawatts of electrolysis capacity under development by 2025, second to produce the cheapest green hydrogen in the world by 2030. And in this, there is particularly a lot of potential in the Atacama Region in the north with solar power, and in the Magallanes region in the south with wind power. And the government is estimating that in these two regions, there could be the lowest costs by 2013. And the third goal is to be among the world's three largest hydrogen exporters by 2040.

And this would be after of course satisfy a local demand but because Chile is such a small market. It is likely to be satisfied quite quickly and have a lot of potential for exports. The government is also expecting that this would contribute to reach the goal to be carbon neutral by 2050. And this goes in line with the carbonization plan that it is in place that consistent closing all coal fire plants by 2040. So the state of this strategy – well, first of all, the regulatory framework is being drafted. Hopefully we will get to see what it is about in the coming months.

The government is also saying that there are at least 40 pilot projects under consideration. And this includes multinational companies such as AS Jenner, Enel from Italy, NG from France. And also the first green hydrogen plant which is going to be in Magallanes Region already started its process for the environmental approval last year. This is a $38 million investment that includes companies and this mining and energy, Enel, ENAP which is Chile's state owned energy company, Simmons and Porsche. What the government is doing? They are offering fiscal incentives. They are dispersing $50 million dollars in subsidies which some argue that it is not enough.

But well, this is all very early stages. We will have to see how this developed. The government is also incentivizing demand by bringing in electric busses particularly to Santiago, the capital, and also encouraging the use of electric vehicles in the mining sector which is Chile's largest sector. So of course, they would have a clear impact. One of the advantages of these plans in Chile is that Chile offers a very business friendly framework, so private and foreign investments are allowed almost in all sectors. But this ties with also a challenge because this year Chile is going to rewrite the constitution.

So this will generate more uncertainty about this framework. And on top of that, there are Presidential elections in November, which will of course contribute to more uncertainty. In any case, I don't think that any of these events will derail the process because first of all, there is cross party consensus in Chile to develop clean energy because Chile does not have or have very little hydrocarbon resources.

So traditionally, it has been a net energy importer. And also Chile needs foreign investment and the know how Chile doesn't have the capacity that technology, the human resources or the expertise to develop green hydrogen by themselves. In any case, if for example, the left wins government and I'm talking Frente Amplio Broad Front or the Communist Party. Even in that case, I don't think that they would completely move away from the strategy.

I think that they would try to promote more involvement of state owned companies such as CODELCO or ENAP, maybe reduce subsidies. This could delay the pace of the program but I don't think it will completely derail it.

Alexia Ash: Well, that's great to hear Carla. It sounds like Chile is really providing beacon forward for Latin-America for those of us who are interested in ESG becoming a more common in the region. What struck me about the three overviews you all just gave is that, not only is ESG familiar to the country risk perspective as I mentioned at the top. But actually, the three pillars impact each other so clearly. Governments are writing government policy and being pressured by civil society. Climate change is one of the truly global issues and yet the cases you've mentioned here are all concerned with national sovereignty over resources.

A reminder to all of us that the politics are ultimately local but interesting to this point, the pressure is both international and local coming from a civil society that is not necessarily restricted to country borders. Johanna, on Mexico, you mentioned that the current government has curtailed green energy production and that it will likely fall short of its Paris targets. To what extent is that a political question for Mexico? Is there any chance of a government leadership change that would make a difference?

Johanna Marris: Well, I think it's definitely a question of government priorities. We've seen this government very clearly focused on what it calls its fourth transformation agenda and sovereignty over energy resources and natural resources is a part of that as is eradicating alleged corruption in the private sector. And what we've been seeing in terms of measures against the renewable sector in particular full very squarely within these priorities and this kind of ideology.

And I think it's very likely this government, you know, right through to the end of its term to continue with this drive of really pushing to increase state participation at the expense of private companies. I think at the moment the likelihood of government change – changing that significantly is moderate to low. We actually have midterm elections coming up in June, 2021 and if the ruling parties Wadena do well in that and maintain a majority in the lower house.

Then, we could actually see kind of an intensification of these efforts and an even bolder approach that we've seen up until now. And Wadena itself remains highly popular as does the President, President of [indiscernible] [00:19:08]. And it's actually still quite likely that after these current terms it ends in 2024 that we could see potentially another Wadena government. So if that was the case then, then we could expect a [indiscernible] [00:19:17] continuation of what we've been seeing up till now.

Alexia Ash: Yes, very interesting. Really important to think about who's in charge here. Similarly, Elsa, I think in our analysis previously about Brazil, we've said that essentially the kind of French sanctions aren't going to have a big impact on deforestation of the amazon not least because they're aimed at the wrong specifics. But in your view, what would it take for Brazil to curb that deforestation? And is it possible under the current government?

Elsa Rejalus: Well, I mean as we've discussed, Bolsonaro is under pressure from various groups. And in particular he's quite keen to maintain support from business leaders. And it's increasingly obvious that investors are aware that there is now a growing risk that simply operating in Brazil will constitute a reputational risk, and that this in turn will increase the burden significantly on companies to do those things like demonstrating their own commitments to environmental sustainability, and adapting their supply chains like we discussed earlier.

And it was actually pressure from these business groups that prevented Bolsonaro from abandoning the Paris climate agreement like he initially threatened to do, which means that fear that investors will withdraw a financing is certainly influential. Besides that we've discussed as well as business leaders, EU leaders and in particular, Macron. Aside from the actual sanctions, EU leaders are now using this concern about deforestation as a reason not to move forward with the Marcus or trade partnership.

If this is compounded by boycotts further, it will force Brazil to commit to Amazon protections. That said enforcement of any commitments is still unlikely to be strong. But it will limit how much Bolsonaro can actively pursue environmentally harmful policies. Again though Bolsonaro has committed to policies supporting really opening up the Amazon to mining and oil exploration, and while this pressure from investors and pressure from international governments is likely to have some effect on regulations in terms of deforestation it, is unlikely that he will back down from policies designed to open up the Amazon to industry.

And he has continued to argue that these are key to Brazilian development. So I think

going forward what we're going to see is this balance between potentially more rhetoric around controlling deforestation. But I think it's unlikely that we're going to see scaling back of actual industry in the Amazon.

Alexia Ash: Thanks. And I guess Carla, Chile seems to be the exception in this context. What do you think is driving that change in Chile? And could we see it spread to other Latin-American countries?

Carla Selmon: Yes. So I think that – first of all what is driving that change in Chile really is the need because as I said, Chile has almost no hydrocarbon resources or very little, and has been historically a net energy importers. So they have been keen to achieve energy security and that will continue to be the case. I don't know if Chile is the exception or the example. I mean I would be more inclined to think it's an example for many other countries because there's actually a lot going on in Latin-America on renewable energy.

So renewable energy for example is the sector that has attracted the highest percentage of the total announced investment a year in Latin-America since 2015, and this has been driven not only by environmental concerns really this has been driven by economics, because the costs of renewables has declined significantly in the past years, and it has actually become a competitive alternative. So we have countries in Latin-America for example, Costa Rica and Uruguay that have almost 100% of their energy matrix coming from renewables.

So there's also a lot of potential for green hydrogen there. Other country such as Colombia, Colombia has shown a very strong political will to develop green hydrogen. And Argentina as well, they have mentioned some plans. The thing is with these two countries they would need to develop their renewables potential first. And also other countries such as Peru and Bolivia are also announcing plans for green hydrogen.

Alexia Ash: Thanks, Carla. And clearly there is so much more we could talk about in the Latin-American context with this subject. We’ll probably keep it here for today. But before we wrap up I just want to ask all of you one final question. I'd be interested to hear what each of you think on this which is, which you think is the most likely to have an impact on current government response? Is it an increased demand from investors for a focus on ESG? Or is it civil society activism? Or is – Carla just mentioned, is it actually market demand that's going to push this agenda forward in Latin-America if we indeed see that happen? Elsa, I might look to you first. What do you think?

Elsa Rejalus: Yes. For me, I think the best way to consider this is that the relationships between activism, investor behavior and government policy are really interlocking into some extent. They're mutually interdependent. As we mentioned earlier there is this push pull effect. And often it's communities drawing attention to environmental concerns through activism and highlighting the human cost of climate change and deforestation and contamination, and these things that are the key issues that are one of the major drivers of activism.

So if we returned briefly to the Ecuador case. In the case of the oil trade in Ecuador, it was initially communities drawing attention to the damage that the oil spills had caused that resulted in those reports that were published then influenced investor behavior. So it's that activism then that is key to influencing how consumers and investors behave. And then finally with investor behavior beginning to impact companies, we see growing pressure being placed on governments to improve their regulations and responses. So I think any one of those can be part of a chain of events.

Alexia Ash: Yes, very fair. We need all of them. Although it sounds a little bit from your explanation at least in my view that it starts with that on the ground activism then flows upwards from there. But I don't want to put words in your mouth.

Elsa Rejalus: Oh, I would agree with that. But I think in lots of ways it might start with the communities but then it's the strength of the response to that in terms of how broad an audience there is the activism kind of drawing attention to that that then leads to a wider influence on consumer behavior.

Alexia Ash: Interesting. Johanna, what do you think?

Johanna Marris: Yes. I mean, I would agree with that. I think it's very heavily dependent obviously on individual governments and what their priorities are. We have some that are extremely open to kind of global dynamics, global demand, what the markets externally are, are wanting and looking. And we have some governments that are completely internally focused and you know have the whole view on the domestic issues. And I think Mexico obviously would come into that second category.

And we've seen actually very little response to private sector concerns both internationally and then actually inside Mexico as well, we've had a deteriorating relationship between the private sector and the government really since this current government came to power. So I think in Mexico's case, it won't be any change won't come about by private companies raising their concerns or even legal challenges that will be definitely have to come from more civil society activism.

But actually as I said before, the government is so focused on its national agenda and what it's trying to achieve? And those priorities actually quite narrow that we have seen cases of civil society activism where there hasn't been as much attention paid as others. So I think in Mexico we have the projects which are in line with the government priorities receiving much more likelihood of response than others which are not as prioritized by them. And I think it will – its desire to prioritize state owned companies etcetera as I was saying before, we'll still override activism.

So I think that's the case there. But yes, I say across the region I think we have, we have these certain countries which are just very highly sensitive to what they perceive as outside interference. I believe it would be another example where it won't be as responsive to if it sees people as putting pressure on from outside for it to manage its resources in a certain way. So that's something that, yes, each individual government will have to manage and respond to individually I think.

Alexia Ash: So, so far Elsa said we need everything, and Johanna said, I need to add a category to my question. So Carla, I'll leave the last – I'll leave the last assessment with you. What do you think?

Carla Selmon: I would agree with Joanna that, I mean it depends a lot on the country and the government. It depends a lot on the country and what are the resources that they have available on and what are their needs? I would tend to think it's more about necessity. So for example if a certain country needs to change the regulation to make it more aligned with ESG in order to attract investment and that would be a motivation. But only if it's economically available, I don't think that any government would push for this if it's not going to give them like an economic benefit.

Alexia Ash: Yes. Absolutely. What a great note to end on that. It has to make sense for us to move forward certainly something that we've seen in the private sector as well. I will end it there. Thanks so much Elsa, Johanna and Carla for joining me today. And I would just encourage everyone listening to keep an eye out for our ESG spotlight pieces on the ECR blog for our latest ESG Relevant analysis. And in the meantime, have a good day guys.

Female Speaker: Thank you for listening to the Economics and Country Risk podcast S&P Global. Connect with us on twitter at Economics Risk and don't forget to sign up for our newsletter at S&P Global.com/ecr.