Sustainability Policies and Practices for Corporate Governance in Latin America

4. Key sustainability matters

Abstract

The chapter provides evidence on which sustainability matters may be prioritised by market participants and regulators in Latin America. By contemplating investors' perspectives, shareholders' resolutions and matters considered by the boards of directors, this chapter reviews the sustainability information that could be regarded as a priority. Water and wastewater management, climate change, human capital, data security and customer privacy, and human rights and community relations stand out as the most important sustainability matters in Latin America.

Sustainability‑related information can include a broad range of matters, from climate change and greenhouse gases (GHG) emissions to human rights and community relations. Understanding such different types of issues may not be easy for listed companies, investors, and capital markets regulators. They may need, therefore, to prioritise their scarce resources.

In a survey with 42 global institutional investors, 85% cited climate risk as the number one engagement priority with companies, followed by human capital management (64%) and board composition and executive remuneration (64%) (Morrow Sodali, 2021, p. 11[12]). Similarly, large asset managers investing in Latin America reported that climate change (70%) and human capital (63%) are significant matters for them, although less important than water and wastewater management (77%) (Table 4.1). Interestingly, medium and small‑sized asset managers place data security and customer privacy as one of their priorities for their investment and engagement decisions.

Table 4.1. Main sustainability matters for asset managers in Latin America during the last 12 months

Question: During the last 12 months, have the following issues been incorporated into an investment decision or prompted you to engage with a company (including to vote in a shareholder's meeting)?

Sustainability issue	Large‑sized asset managers	Medium‑sized asset managers	Small‑sized asset managers
Water & Wastewater Management	77%	57%	56%
Climate Change	70%	53%	52%
Human Capital	63%	66%	69%
Human Rights & Community Relations	63%	59%	54%
Biodiversity and Ecological Impacts	59%	59%	60%
Data Security and Customer Privacy	57%	67%	68%
Supply Chain Management	56%	56%	59%
Waste & Hazardous Materials Management	53%	53%	57%
Air Quality	38%	34%	33%
Other ESG issue	74%	47%	37%

Notes:

¹ In the survey questionnaire, asset managers, could answer "yes" or "no" or leave the question unanswered. The shares in this table consider only the universe of investors that answered “yes” or “no”, which is slightly different for each one of the sustainability issues. For instance, 470 asset managers provided an answer related to "Climate Change", while 519 answered to "Waste & Hazardous Materials Management. On average, 91% of the asset managers responded to each sustainability issue.

² The survey questionnaire only presented the nine sustainability issues listed in this table, which often have the same names as these issues are presented in the SASB mapping (respondents could also add "other ESG issues"). To facilitate answers and to make the results more easily comparable with other similar surveys, the OECD questionnaire merged some sustainability issues in the SASB mapping: "Climate Change" (SASB mapping has three climate‑related issues); "Human Capital" (three SASB mapping issues); "Data Security and Customer Privacy" (two SASB mapping issues).

Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.

In relation to sustainability issues included in shareholding resolutions, 61 Latin American companies, among which 14 in the large‑cap indexes, voted a shareholder resolution on human capital in the last 36 months. Another 41 and 38 companies reported shareholder resolutions on data security and customer privacy, and climate change, respectively (Table 4.2). This is in line with asset managers' overall preferences when making an investment decision and engaging with companies.

Table 4.2. Number of Latin American companies whose shareholder meetings voted on sustainability‑related shareholder resolutions in the last 36 months

Question: In the last 36 months, has a shareholder meeting of your company voted an ESG‑related shareholder resolution?

Sustainability issue	Companies in large‑cap indexes	Other companies	All
Human Capital	14	47	61
Data Security and Customer Privacy	7	34	41
Climate Change	15	23	38
Human Rights & Community Relations	11	26	37
Water & Wastewater Management	4	25	29
Other ESG issue	11	17	28
Supply Chain Management	5	22	27
Biodiversity and Ecological Impacts	5	21	26
Waste & Hazardous Materials Management	4	19	23
Air Quality	4	16	20

Notes:

¹ In the survey questionnaire, companies could answer “yes” or leave the question unanswered. The numbers in this table consider only the universe of companies that answered “yes”. If a company had more than one shareholder resolution on the same sustainability matter during the previous 36 months, the “yes” counts only as one in this table.

² For information about sustainability matters included in the survey, see notes in Table 4.1.

Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.

Table 4.3. Share of companies in Latin America whose board of directors considered sustainability issues during the last 12 months

Question: During the last 12 months, did the board of directors of your company consider one of the issues listed below?

Sustainability issue	Companies in large‑cap indexes	Other companies
Human Capital	95%	87%
Data Security and Customer Privacy	91%	81%
Human Rights & Community Relations	81%	67%
Climate Change	80%	56%
Supply Chain Management	65%	64%
Waste & Hazardous Materials Management	63%	52%
Biodiversity and Ecological Impacts	58%	44%
Water & Wastewater Management	55%	54%
Air Quality	34%	33%
Other ESG issue	96%	68%

Notes:

¹ In the survey questionnaire, companies could answer "yes" or "no" or leave the question unanswered. The shares in this table consider only the universe of companies that answered "yes" or "no", which is slightly different for each one of the sustainability issues. For instance, 238 companies provided an answer related to "Human Capital", while 229 answered to "Climate Change”. On average, 76% of the companies surveyed responded to each sustainability issue.

² For information about sustainability matters included in the survey, see notes in Table 4.1.

Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.

Ninety‑five percent of Latin American companies in the large‑cap indexes and 87% of the remaining ones reported human capital as a sustainability issue recently considered by the board of directors. Data security and customer privacy, and human rights and community relations also rank among the most reviewed issues. Notably, while climate change was considered by 80% of the large companies’ boards, only 56% of boards in the remaining companies considered the issue (Table 4.3).

An analysis of the sustainability risks that companies face according to the SASB Sustainable Industry Classification System® Taxonomy1 (“SASB mapping”) shows that globally companies that account for 67% of the total market capitalisation have human capital risks as a financially material factor (Figure 4.1). In the United States, the respective share is even more pronounced, where companies representing 73% of market capitalisation face human capital risks. Climate change risk is financially material for companies representing 65% of global market capitalisation. In Latin America, climate change risks are more relevant than in other regions, being financially material for 71% of companies by market capitalisation, ranging from 56% in Colombia to 77% in Mexico. Human capital (55%), waste and wastewater management (46%) and data security and customer privacy (37%) are also key sustainability‑related risks identified as financially material in Latin America.

Companies facing “air quality” as a material risk in Latin America represent 34% of the region’s market capitalisation, although globally only 15% of the companies face this risk in a financially material way. In contrast, “employee engagement, diversity and inclusion” is financially material to companies representing 38% of global market capitalisation while it accounts for only 15% in Latin America.

Figure 4.1. The share of market capitalisation by selected sustainability risk, 2021

Note: In order to facilitate the comparison of this figure with the OECD surveys presented in this report, this figure merges some sustainability issues in the SASB mapping: “Climate Change” is a merger of “energy management”, “GHG emissions” and “physical impacts of climate change” in the SASB mapping; “Human Capital” merges all three sustainability issues within this dimension in the SASB mapping; “Data Security and Customer Privacy” are two different issues in the SASB mapping.

Source: OECD Capital Market Series dataset, FactSet, Refinitiv, Bloomberg, SASB mapping, OECD calculations.

Table 4.4. Selected indicators for sustainability issues where risks are likely to be financially material

Dimension	Sustainability Issues	Share of the market capitalisation of industries where the risk is material (in total market cap.)		Number of industries where the risk is material (out of a total of 77)
		Global	Latin America
Environment	Water & Wastewater Management	26%	46%	25
	Energy Management	47%	52%	33
	GHG Emissions	27%	41%	25
	Air Quality	15%	34%	17
	Waste & Hazardous Materials Management	21%	28%	19
	Ecological Impacts	9%	21%	14
Social Capital	Data Security	38%	37%	15
	Access & Affordability	19%	27%	8
	Human Rights & Community Relations	14%	18%	6
	Product Quality & Safety	26%	15%	26
	Selling Practices & Product Labelling	19%	17%	15
	Customer Welfare	12%	12%	14
	Customer Privacy	19%	7%	6
Human Capital	Employee Health & Safety	25%	39%	12
	Employee Engagement, Diversity & Inclusion	38%	15%	27
	Labour Practices	15%	18%	12
Business Model & Innovation	Product Design & Lifecycle Management	53%	54%	37
	Supply Chain Management	24%	21%	19
	Materials Sourcing & Efficiency	27%	22%	19
	Business Model Resilience	7%	15%	7
	Physical Impacts of Climate Change	6%	6%	8
Leadership & Governance	Business Ethics	27%	31%	18
	Systemic Risk Management	17%	35%	8
	Critical Incident Risk Management	10%	18%	14
	Management of the Legal & Regulatory Environment	7%	10%	5
	Competitive Behaviour	8%	10%	11

Note: Sector classification is according to SASB mapping.

Source: OECD Capital Market Series dataset, FactSet, Refinitiv, Bloomberg, SASB mapping, OECD calculations.

Notwithstanding, the mapping of these sustainability risks cannot be treated as the market value at risk, which would depend on an individual assessment of each company’s financial exposure to these risks. However, the share of market capitalisation can serve as a reference to Latin American policy makers to assess the differences in economic sectors’ distribution among locally listed companies that may justify priorities when supervising and regulating their capital markets.

Note

← 1.  © 2021 Value Reporting Foundation (merged into the IFRS Foundation in July 2022). All Rights Reserved. OECD licenses the SASB SICS Taxonomy (or “SASB Mapping”). The SASB Mapping presents 26 sustainability issues categorised into 5 dimensions (see them all in Table 4.4), classifying which issues would be financially material in each of 77 industries in total.