ESG Criteria in Argentina

Meaningful Change or Meaningless Greenwashing?

Companies and investors are increasingly taking environmental, social, and governance (ESG) factors into account as they make investment decisions. But worldwide, and especially in emerging markets like Argentina, such standards can only take hold with a serious focus on compliance.

Sustainable development is the idea that humanity’s future rests equally on three pillars: economic growth, environmental protection, and social inclusion.[1] The concept first gained global recognition in the 1980s and 1990s and its influence has grown steadily ever since.

Today many companies take environmental and social concerns into consideration as they define their internal organization and business strategy. The idea of sustainability also has become central to investment, with companies and investors seeking competitive returns that have the potential to make a positive impact in the world.

Environmental, social, and governance (ESG) investing refers to standards that ensure ethical conduct in these three areas by considering the impact a company or investment has on the environment and society in addition to maximizing shareholder return on investment. Globally, sustainable investing is on the rise and in 2022, ESG investments comprised almost 18 percent of foreign financing for emerging markets outside of China.[2]

This article questions whether under Argentine law ESG standards are practicable and if the Argentine legal framework is prepared to measure compliance and to enforce these standards. In short, do ESG endeavors make sense in Argentina and similar emerging markets? Without clear statutory guidelines for implementation and compliance, is their integration into investment decision-making just meaningless “greenwashing”?

To begin with, market forces pressure ESG compliance. Increasingly, banks, investors, and other stakeholders include ESG criteria in their analysis and exclude companies that do not demonstrate a clear commitment to sustainable development or are involved in activities with a negative impact in any of the ESG spheres.

ESG standards also work positively to attract talent. Newer members of the workforce often consider environmental matters a top priority when choosing a job.[3] Moreover, attention to ESG factors can create long-term enterprise value, attract customers, develop business transparency, and reduce reputational risk. But are all these advantages likely to be exploited in Argentina? Is the internal behavior of Argentine organizations compatible with these criteria?

In Argentina there is no mandatory ESG reporting regimes. Nonetheless, the Argentine National Securities Commission (Comisión Nacional de Valores or “CNV”) has been proactive in issuing non-mandatory guidelines since 2019, offering a framework relevant to socially responsible investment.

Notable among these are the “2021 Guidelines for Socially Responsible Investment in the Argentine Capital Market,” the  “2021 Guidelines for External Evaluators of Social, Green, and Sustainable Bonds”[4], and the “2023 Guidelines for the Issuance of Thematic Securities in Argentina”[5], expanding the scope to include gender, “blue” (ocean conservation), “orange” (cultural and creative) and “transition” (financing the issuer’s move to environmental sustainability) bonds.

The guidelines propose external reviews, with potential delisting if conditions are not met, leaving the CNV with authority to apply sanctions when necessary.

The Bolsa de Comercio de Buenos Aires (the Buenos Aires Stock Exchange or the “Exchange”)  also plays a role in Argentina’s ESG landscape. The Exchange has established a sustainability index featuring around 20 issuers of diverse industries ranging from banking to energy and food manufacturing. This index measures environmental, social, governance, and sustainable development contributions. Additionally, the Exchange offers a corporate governance index currently featuring five companies from the banking and oil & gas sectors.

The Exchange further publishes guidelines and regulations for the issuance and listing of “social” (financing social impact projects), “green” (environmental), and “sustainable” (the financing of social and green projects) bonds. Issuers are required to submit a sustainability report along with their annual accounting documentation, subject to external review and audit. The label can be withdrawn if ongoing requirements are not met. For qualifying listings, the Exchange has reduced filing and regulatory fees as a means to incentivize sustainable practices.

The results of these efforts are tangible, with USD 2 million invested in 63 green, social, and sustainability bonds since 2019. At the local level, various provinces and city governments have ventured into sub-sovereign greens, social, and sustainability bonds as well. These projects span diverse initiatives, from solar energy projects to bike lane construction, sewer system improvements, public transportation, and lighting.

The results of these efforts are tangible, with USD 2 million invested in 63 green, social, and sustainability bonds since 2019. At the local level, various provinces and city governments have ventured into sub-sovereign greens, social, and sustainability bonds as well. These projects span diverse initiatives, from solar energy projects to bike lane construction, sewer system improvements, public transportation, and lighting.

In a significant collaborative effort, on September 7, 2021, the National Ministry of Economy, the Central Bank of the Argentine Republic (BCRA), the CNV, and the Superintendency of Insurance of the Nation signed a joint declaration[6]. This declaration aims to create a conducive environment for the financial sector to attract public and private investments aligned with the “Sustainable Development Goals.” The agreement also addresses climate change through the financing of mitigation and adaptation strategies.

Likewise, the National Anti-Corruption Office has created a voluntary registry of companies that have a compliance program. For now, this program only includes issues related to corruption prevention and transparency. Nonetheless, the office is currently developing a second registry to cover human rights, gender, and environmental policies.

Despite the limited actions of a government preoccupied with various existential matters, the private sector is active in ESG in Argentina. There are 128 “B companies” in Argentina, representing over 14% of all such companies in Latin America. This suggests that ESG is increasingly a part of the Argentine regulatory agenda, although strict control of compliance and implementation remains pending. In a country like Argentina, where more immediate concerns of business survival often eclipse ethics, the question remains: Can ESG criteria thrive without a clear enforcement framework?

The CNV’s U.S. analog, the Securities and Exchange Commission, has sought to give teeth to ESG regulation and punish misleading representations commonly known as greenwashing.[7] In 2022, the SEC charged an investment advisory firm for misstatements and omissions about ESG investment considerations for mutual funds that it managed. Over a three-year period, the SEC found that the company, BNY Mellon Investment Adviser, represented or implied that all investments in the funds had undergone an ESG quality review even though that was not always the case. To settle the charges, BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty.[8]

More broadly, the SEC has increased its efforts to review ESG investing through its Division of Examinations, highlighting the risks presented by rapidly growing demand for ESG products and services, their increasing number, and the lack of standardized and precise ESG definitions.[9]

Significantly, the SEC has noted the importance of consistency between the actual portfolio management practices of investment advisers and funds, and their disclosed ESG investing processes or investment goals. Moreover, through its Risk Alert analysis (drawn up by the Division of Examinations), the SEC has attempted to highlight risk areas and assist firms in developing and enhancing their compliance practices.[10]

Ideally, one can imagine the need for similar regulatory attention in Argentina.  Nevertheless, while the SEC offers an effective strategy for other markets, it is unrealistic to think it could be applied in this country since dealing with the economic stresses of survival is the top priority for most Argentine companies.

Without continuous and efficient monitoring, ESG standards can easily be manipulated to deviate from their intended purpose. The founding principles of ESG criteria and the good faith of investors must be in sync with regulation that sanctions non-compliance.

Although Argentina has made efforts to foster a sustainable investment environment, there remains a long road to achieve a meaningful establishment of ESG criteria. The ESG system works well in the developed economies, where market forces pressure for ESG compliance.

In Argentina, however, the highest priority for businesses is survival amid political and economic instability. For ESG standards to be effective, Argentina would need to overhaul its regulatory system and strengthen the focus on compliance and enforcement. The SEC offers a model that, given Argentina’s current economy and regulatory system, is unlikely to be effective.

More rigorous enforcement and policies could offer ESG a more promising future in Argentina. Without these, ESG standards will remain more a greenwashing veneer than a meaningful metric for investing and encouraging sustainable development. Absent a change, Argentine companies will only comply with ESG standards to the extent required to trade with or receive investment from foreign actors (e.g., institutional investors, banks, and multilateral entities) required to “check the box” as a condition to investment or trade.

[1] https://www.un.org/sustainabledevelopment/development-agenda/

[2] https://www.imf.org/en/Blogs/Articles/2022/03/01/sustainable-finance-in-emerging-markets-is-enjoying-rapid-growth-but-may-bring-risks

[3] https://www.esgtoday.com/over-40-of-gen-z-millennials-would-switch-jobs-over-climate-concerns-deloitte-survey/

[4] General Resolution No. 896/2021 (See https://www.boletinoficial.gob.ar/detalleAviso/primera/246755/20210712)

[5] General Resolution No. 963/2023 (See https://www.boletinoficial.gob.ar/detalleAviso/primera/287672/20230602)

[6] https://www.bcra.gob.ar/Noticias/BCRA-CNV-SSN-acuerdo-finanzas-sostenibles-i.asp

[7] Greenwashing could be defined as a marketing practice aimed at creating an illusory image of environmental responsibility.

[8] https://www.sec.gov/news/press-release/2022-86

[9] https://www.sec.gov/files/esg-risk-alert.pdf

[10] https://www.sec.gov/files/esg-risk-alert.pdf