Environment tops agenda as Chile plays catch-up on ESG

Sustainable financing is poised to make a substantial leap next year in Chile, South America’s most stable economy.

Around $6 billion in assets under management in Chile currently count as ESG financing, according to the Chilean Association of Investment Fund Managers (Acafi), with the biggest chunk in environmental investments. It amounts to roughly 17 percent of total assets under management. In addition, the Chilean government in March became the first sovereign to issue an sustainability-linked bond, generating more attention to sustainable finance in this country of nearly 20 million.

The potential game-changer for the industry is not major legislation or an announcement that generated headlines, but a regulatory change approved in 2021 by the Financial Market Commission (CMF), Chile’s securities watchdog, concerning the content of annual reports filed by companies listed on the local bourse. The change requires companies to disclose ESG practices in their report. The first filings under General Standard 461 will be in 2023.

“Companies had to implement the requirement in 2022 and ESG standards will be included in filings for the first time in 2023. I think this is going to completely change the way companies understand and implement ESG,” said Juan Ibañez, founder and director of a program for corporate sustainability at the Catholic University of Chile.

Stephan Luhrmann, a lawyer and head of the environment and ESG groups at CMS Carey & Allende, a Chilean law firm, said the state’s ESG bond should also contribute to the new climate. He said issuance of the bond should “help incentivise financial instruments for ESG”. “It is a good first step,” he added.

While the CMF regulation will create opportunities, however, the market is young and Luhrmann said more changes will be required in the coming years to ensure momentum. “Chile has very few norms to determine what is sustainable. We do not have the same kind of taxonomy laws (and) information transparency norms here as in Europe.”

Environmental focus

Options for sustainable financing in Chile tend to come down along environmental lines within the country’s primary economic pillars, mining and agriculture.

María José Montero, a partner at social investment fund FIS Ameris, said the focus of sustainable financing in Chile in the near future will be on the environmental component as the country’s principal revenue sources strive to become greener.

“In an ideal world the focus would be environmental and social, because they go together,” she said. “But in the real world it will be on environmental issues because they are more profitable and easier.”

She added: “The areas with the greatest challenges are where we need to redirect private capital.”

Chile is the world’s leading producer of copper and second in lithium, according to the US Geological Survey. The country exported nearly $95 billion in 2021, according to the central bank, with minerals accounting for $61 billion. Industrial products, including those based on the mining and agriculture sectors, brought in $27 billion and agriculture $7 billion.

The key inputs for mining, besides the ore, are energy and water – both areas which are attracting sustainable investment in the country.

Renewables switch

Two international mining giants, Australia’s BHP and UK-headquartered Anglo American, have been switching to renewable energy over the past years as they strive to produce greener copper.

In 2020, BHP agreed to pay $840 million for early termination of an energy supply agreement with a coal-burning thermal electric plant. The agreement ended in 2021, instead of 2026 at the company’s Spence mine and 2029 at its Escondida mine. BHP also began ramping up its transition to the use of desalinated water. The goal is to use only desalinated water by 2030.

Anglo America announced in 2021 that it would only use renewable energy sources for its mines in Chile, as well as Brazil and Peru. It has also commissioned Chile’s first green hydrogen project.

Ibañez said the mining industry was an early convert to ESG in Chile, because it recognised that it would have to meet the challenge of tougher regulations in countries where it exported copper, lithium or other metals.

“The mining industry understood that it had to work on the water and energy it uses, and the pollution it generates,” he said. “If you are going to export lithium for batteries to Germany, for example, you need to comply with its standards.”

He said the demand for renewable energy from mining and other industries has led to a surge in sustainable investment in wind and solar projects around the country.

“I think there are a lot of opportunities. We have a very strong investment in renewables and there are very large projects in solar and wind energy. I believe that this is going to continue.”

The Chilean Association for Renewable Energies (Acera) reported in August 2022 that non-conventional renewable sources accounted for 40 percent of installed generating capacity, with solar power at 23 percent, or 7.7GW, and wind at 12.5 percent, or 4.2GW.

Some of the largest sustainable financing deals in emerging economies for renewable projects have been in Chile, including Ireland-based Mainstream Renewable Power’s project for 1.35GW in wind and solar plants. Its nearly $1 billion project in Chile involved financing from IFIs, such as the Inter-American Development Bank’s IDB Invest, and commercial banks including Santander Chile.

Other sectors that have put Chile on the map – fisheries (salmon), forestry production and wine – are also ripe for sustainable financing.

Salmon and trout exports in the first half of this year were $3.2 billion, a jump of 30 percent from the same period in 2022. The industry, however, faces potential EGS headwinds if expansion is to continue.

A report on the salmon industry and human rights, published in October 2021 with funding from the Danish and Swedish governments, claimed that the industry “has impacted and is still having adverse impacts at different levels, including human rights”.

Ibañez said the industry requires investment to grow and the report should be seen as a roadmap for improvement. “This report was critical and raised important issues, such as getting a social licence from coastal communities. Addressing these issues will ensure access to markets in the future.”

Taking root

Montero, at FIS Ameris, is confident that sustainable financing has taken root in Chile, even though there is still a long way to go. “The concept is relevant and is here to stay,” she said. Sustainable finance is a process and not something that is going to happen from one day to the next.”

A member of the board of directors of the Acafi, the investment managers’ group, since 2018 – she was the first woman elected to the board – Montero has pushed for greater inclusion of sustainable finance. She said the work is based on three pillars – “disseminating the concept of sustainable investment, helping the industry put the concept into practice, and guaranteeing adherence to regulations”.

Her particular focus is impact-first investment, which has grown but is still only a small component of overall assets under management. Impact investment accounted for $138 million of assets in 2019, the first time it was measured. It increased to $318 million in 2021 and $390 million so far this year. It is just above 1 percent of the $37 billion in assets under management.

“Impact investment has been growing and evolving, but not at the speed we need for it to grow,” she said.

A new wrinkle emerged on 4 September, when Chileans voted overwhelmingly to reject a new constitution to replace one written during the country’s military dictatorship (1973-1989). Similar to constitutions approved this century in Bolivia and Ecuador, the proposed Chilean constitution was presented as sustainable. The majority of Chileans, as well as local and foreign investors, did not agree.

Ibañez said the vote should be seen as an opportunity to come up with new proposals, including for private pension funds that are the largest source of institutional investment and have been vilified in recent years.

He said that private pension funds were slow to understand ESG and if they had moved on it a few years ago, the situation would now be much different.

“If the pension funds had come up with an ESG investment strategy 10 years ago, instead of when the protests began in 2019, we would be looking at a very different scenario. They could have explained how they were benefiting the country with sustainable development, improving wellbeing for all Chileans,” he said.

Montero feels the same way about the broader uncertainties concerning ESG.

“There is some reticence, but I think the criticism is valuable, because it allows us to respond and work toward instruments that allow us to lower uncertainties,” she said.