How to integrate ESG strategies when investing in Argentina and the wider region

Introduction

The incorporation of environmental, social and governance (ESG) criteria into business strategies is no longer a novelty but a necessity. Investors, governments and the public have heightened their scrutiny of how businesses impact the world around them. Increasingly, companies are being judged not just on their financial performance but on their contributions – or lack thereof – to sustainable development, social welfare and ethical governance practices. As such, integrating ESG considerations into business plans and day-to-day operations is a fundamental expectation for organisations operating in the global market. From investment decisions and capital allocation to supply chains and talent management, ESG now affects nearly every aspect of corporate strategy.

The stakes are especially high in M&A, where the potential for growth and risk are both amplified. ESG criteria are playing an increasingly pivotal role in M&A, particularly as investors conduct due diligence on potential acquisitions and strategise post-closing integration. Assessing how a company addresses its environmental responsibilities, how it interacts with the communities it affects, and how transparent and ethical its governance structures are can make or break a deal. This is particularly relevant in emerging markets such as Latin America, where challenges such as limited ESG awareness, weaker regulatory frameworks and scarce public information complicate the process of integrating ESG into investment decisions.

The M&A landscape in Latin America, and particularly in Argentina, is in a transformative phase. As international investors increasingly focus on sustainable and responsible investments, companies in the region are beginning to recognise the importance of adopting ESG frameworks; however, significant challenges remain, including lack of familiarity with these concepts, uneven regulatory enforcement and fragmented reporting practices.

This chapter explores the different ESG investment strategies, assesses their relevance and challenges in the Latin American M&A context and highlights the urgent need for companies to improve their ESG practices and reporting to meet growing investor demands and seize new opportunities.

Compounding the existing challenges, Argentina is undergoing a time of political change. After decades of failed policies that led to a financial, economic and social crisis, a new libertarian administration took over in late 2023 with a mandate that the public sector regulations and costs be limited. The dilemma Argentina faces is one where the need to boost economic activity and secure a return to sustainable growth does not come at the expense of sacrificing the incorporation of ESG policies and best practices to the market. Implementing ESG policies should be a new condition precedent for developing countries to improve the quality of life and well-being of their citizens. In that sense, international M&A players, that are already more familiar with the ESG requirements, will be an essential tool to enhance the necessary awareness in this field.

ESG investment strategies

Integrating ESG criteria into investment decisions requires adopting specific strategies that can be tailored to the nature of the business, the sector and the regional context. Classical ESG investment strategies include exclusionary screening, best-in-class selection, thematic investment, impact investment, active ownership and ESG integration. Each of these strategies presents unique opportunities and challenges for investors, and each plays a critical role in shaping the future of sustainable investment in Latin America.

Exclusionary screening

Exclusionary screening is the oldest and most straightforward ESG investment strategy. It involves excluding companies that operate in sectors that are considered controversial or of which the business practices conflict with certain ethical standards. Historically, this strategy has been applied to industries such as tobacco, gambling, weapons manufacturing and alcohol production – industries that are deemed harmful or immoral by specific investor groups; however, in recent years, exclusionary screening has expanded significantly to include more specific activities such as deforestation and child labour.

Today, exclusionary screening is applied not only to companies involved in traditional ‘sin’ industries but also to those with poor records in areas like environmental degradation, human rights abuses or governance failures. Investors, particularly those guided by ethical or faith-based principles, use this strategy to ensure their portfolios are aligned with their values.

In Latin America, exclusionary screening presents unique challenges owing to the limited availability of public information regarding companies’ ESG practices. Many companies in the region, particularly smaller and privately owned firms, which comprises the largest proportion in terms in quantity of players in Latin American economies, do not disclose comprehensive data about their environmental or social impact.

Consequently, investors may need to conduct more in-depth due diligence, engaging directly with company management to uncover any potential risks related to ESG violations. For example, in sectors such as mining, where environmental degradation has historically been significant cases, exclusionary screening can be particularly difficult without robust public reporting.

Despite these challenges, exclusionary screening remains an important tool for investors who wish to avoid exposure to high-risk activities. It also serves as a foundation for more nuanced ESG strategies, such as best-in-class selection and impact investment.

Best-in-class selection

While exclusionary screening focuses on avoiding investments in certain sectors, best-in-class selection takes a more positive approach. This strategy involves identifying and investing in companies that outperform their peers in managing ESG issues, regardless of the sector they operate in. Rather than avoiding entire industries or activities, investors seek out the leaders within each sector, more specifically companies that demonstrate a strong commitment to ESG practices and are making measurable progress in these areas.

Best-in-class selection allows for greater diversification compared to exclusionary screening as it does not automatically exclude entire sectors; instead, it rewards companies that are innovating and making significant strides in areas like carbon reduction, worker safety and ethical governance. This strategy can be especially useful in industries that are critical to the economy but have traditionally been associated with high environmental or social risks, such as energy, manufacturing and agriculture.

To implement best-in-class selection, investors rely on ESG scoring systems provided by specialised research firms such as Sustainalytics, MSCI and Refinitiv. These systems score publicly traded companies on various ESG factors, allowing investors to compare performance across industries and geographies. For example, Sustainalytics evaluates companies on around 150 ESG factors, while Refinitiv divides its analysis into ESG pillars, further breaking down each pillar into specific categories and themes. The total score for a company is then a weighted average of its performance across these factors, with environmental issues often receiving the highest weight in industries like energy or manufacturing.

However, best-in-class selection also faces challenges in Latin America, where ESG reporting remains fragmented and inconsistent. Many companies, particularly private firms and small and medium-sized enterprises (SMEs), do not have the infrastructure in place or even the financial capability to measure or report on their ESG performance. This lack of data can make it difficult for investors to accurately assess which companies are truly leaders in ESG.

In Argentina, for example, while some large publicly traded companies have started to adopt ESG reporting practices, most private companies still lag behind in this regard. The lack of a developed capital market in Argentina proves to be yet another obstacle for data transparency.

Despite these hurdles, the potential rewards for investors are significant. Companies that excel in ESG management are likely to be more resilient in the face of regulatory changes, reputational risks and shifts in consumer preferences toward more sustainable products. In sectors such as renewable energy, mining, agriculture, and healthcare – industries that are poised for growth in Latin America (and especially in Argentina) – best-in-class selection can help investors identify companies that are well-positioned to capitalise on ESG-related opportunities.

Thematic investment

Thematic investment is another forward-looking ESG strategy that focuses on investing in companies or sectors that are aligned with specific environmental or social themes. Unlike other ESG strategies that assess a company’s current practices and performance, thematic investment looks to the future, identifying trends and innovations that will shape the global economy in the coming decades. These themes often revolve around issues such as clean energy, water scarcity, food security, sustainable infrastructure and technological innovation.

In the context of Latin America, thematic investment offers numerous opportunities, particularly in sectors such as renewable energy, sustainable agriculture and social financing. The region is rich in natural resources and has significant potential for the development of clean energy infrastructure, such as wind, solar and hydropower. Countries such as Brazil, Chile and Mexico have already made significant strides in expanding their renewable energy sectors, and investors are increasingly looking to capitalise on these trends.

Brazil, the region’s largest economy, has invested heavily in hydropower, which accounts for a significant portion of the country’s electricity generation.^[2] Meanwhile, Chile has emerged as a leader in solar energy, thanks to its favourable geographic conditions and government policies that support renewable energy development.^[3] Investors who focus on these themes can benefit from the region’s growing demand for clean energy solutions while contributing to the global transition to a low-carbon economy.

In Argentina, the new administration is providing large incentives (e.g., the incentive regime for great investments^[4]) to attract investments in the sectors mentioned above as well as others to revive the local economy.

Impact investment

Impact investment takes the ESG strategy one step further by explicitly aiming to generate measurable social and environmental benefits alongside financial returns. Unlike exclusionary screening or best-in-class selection, which focus on avoiding or rewarding certain behaviours, impact investment targets companies or projects that actively seek to solve social and environmental problems. These investments are typically made in private markets, where investors can take a larger ownership stake and have a more direct influence on company operations and outcomes.

Impact investment has seen significant growth globally, particularly in sectors such as education, healthcare, clean water, affordable housing and renewable energy. In Latin America, there is enormous potential for impact investors to address critical issues such as poverty, access to healthcare and environmental sustainability. The region faces numerous social and environmental challenges, but these challenges also create opportunities for investors who are willing to take a proactive approach to creating positive change.

For example, in the food and agriculture sectors, impact investors may focus on improving the productivity and sustainability of smallholder farmers. By providing capital and technical assistance to these farmers, impact investors can help them adopt more sustainable agricultural practices, improve yields and gain access to new markets. Similarly, in the healthcare sector, impact investments can be directed toward improving access to affordable medical care in underserved communities, either by supporting the development of low-cost healthcare facilities or by investing in telemedicine solutions that can reach remote areas.

Another area of significant potential for impact investment in Latin America is infrastructure development, particularly in the renewable energy sector or simply energy in general. Many countries in the region are still heavily reliant on fossil fuels for energy generation, but there is growing demand for clean energy solutions. Impact investors can play a key role in financing the development of renewable energy projects, such as wind and solar farms, as well as energy efficiency initiatives that reduce carbon emissions and promote sustainability.

Impact investment in Latin America is still in its early stages, but the region is beginning to attract more attention from international investors who are looking to make a positive social or environmental impact. In countries like Brazil and Mexico, impact investment funds have been established to channel capital into high-impact sectors such as renewable energy, healthcare and education. These funds provide a valuable platform for investors who want to contribute to the region’s sustainable development while also generating financial returns. Similar trends are expected to follow in Argentina.

Active ownership

Active ownership is an ESG investment strategy that involves investors taking an active role in influencing the companies they invest in. This can be done through shareholder engagement, proxy voting or direct participation in company management. Active ownership is typically practised by institutional investors, such as pension funds or mutual funds, who hold significant stakes in publicly traded companies; however, it can also be applied to private equity investments, where investors may have more direct control over company operations.

In contrast to the more passive approach of simply avoiding or rewarding certain companies based on their ESG performance, active ownership allows investors to actively influence the behaviour of companies. This strategy is particularly relevant in sectors where ESG risks are high, such as oil and gas, mining and manufacturing, where companies may face pressure from investors to improve their environmental practices, reduce their carbon footprint and address labour rights issues.

In Latin America, active ownership is still a relatively new concept, in part because of the underdeveloped capital markets (although the level of development and sophistications varies significantly across countries in the region). Nevertheless, it is beginning to gain traction. Investors in the region are increasingly using their influence to push for better ESG practices, particularly in sectors where environmental and social risks are significant. For example, in the mining sector, investors may engage with companies to ensure that they are adopting more sustainable extraction practices, protecting biodiversity and minimising the environmental impact of their operations.

Similarly, in the energy sector, investors may push for companies to transition away from fossil fuels and toward renewable energy sources. This can be done through shareholder resolutions, proxy voting or direct engagement with company management. Active ownership is also being used to address governance issues, such as improving transparency, reducing corruption and promoting diversity on corporate boards.

While active ownership is still in its early stages in Latin America, it is expected to become more prominent as investors increasingly recognise the value of engaging with companies to drive positive change. In particular, as global investors place greater emphasis on ESG criteria, Latin American companies will face increasing pressure to improve their practices or risk losing access to international capital.

ESG integration

ESG integration is one of the most widely adopted ESG investment strategies. Unlike exclusionary screening or thematic investment, which focus on specific criteria or sectors, ESG integration involves incorporating a comprehensive and systematic analysis of ESG factors into the overall investment assessment process. This means that investors do not follow a predetermined rule for excluding certain sectors or companies but rather conduct a detailed analysis of how ESG factors impact the risks and opportunities associated with a particular investment.

ESG integration requires investors to assess both the risks and the opportunities presented by ESG factors. For example, a company with a strong environmental track record may present fewer risks related to regulatory compliance or reputational damage, while a company with strong social policies may have a more engaged and productive workforce. Conversely, a company that is exposed to significant environmental or social risks may face regulatory fines, legal liabilities or damage to its reputation, all of which could negatively impact its financial performance.

In Latin America, ESG integration is becoming increasingly important as investors seek to identify companies that are well-positioned to capitalise on the region’s growing demand for sustainable and responsible business practices. For example, in the energy sector, companies that are transitioning to renewable energy sources are likely to benefit from government incentives and growing consumer demand for clean energy solutions. Similarly, in the agriculture sector, companies that adopt sustainable farming practices may be better positioned to access international markets and meet the growing demand for organic and sustainably sourced products.

ESG integration in Latin America also presents significant challenges. One of the main challenges is the lack of reliable data on ESG factors. While some large publicly traded companies in the region have started to disclose ESG data, many smaller companies do not have the resources or the infrastructure to collect and report on their ESG performance. This makes it difficult for investors to accurately assess the risks and opportunities associated with these companies.

Despite these challenges, ESG integration is likely to become more widespread in Latin America as companies increasingly recognise the importance of ESG factors in attracting international investment and improving their long-term competitiveness. Investors that adopt a comprehensive approach to ESG integration will be better positioned to identify opportunities for growth and avoid potential risks, particularly in sectors where ESG factors are becoming increasingly important, such as energy, agriculture and healthcare.

Challenges of ESG integration in Latin American M&A

Local awareness and regulatory gaps

One of the most significant challenges to ESG integration in Latin America is the lack of awareness and understanding of ESG criteria among local companies, which are the targets of cross-border M&A in the region. While ESG has become a key consideration for investors in more developed markets, such as the United States and Europe, many companies in Latin America are still unfamiliar with the concept. This is particularly true for SMEs, which make up a large portion of the business landscape in the region.

In countries like Argentina, many companies are only beginning to recognise the importance of ESG factors in attracting international investment. While some large multinational companies have adopted ESG policies as part of their global strategies, many local companies still view ESG as a secondary consideration, if they are aware of it at all. This lack of awareness is compounded by the fact that there are few regulatory requirements in place to encourage or mandate the adoption of ESG practices.

In Argentina, for example, there are no comprehensive regulations that require companies to disclose their ESG performance, although some progress has been made with the introduction of voluntary guidelines. The National Securities Commission has issued guidelines that encourage publicly traded companies to report on their ESG practices,^[5] but these guidelines are not mandatory, and compliance is still relatively low. As a result, many companies in the region do not have robust systems in place to monitor and report on their ESG performance, making it difficult for investors to assess the risks and opportunities associated with these companies.

Despite the challenges posed by the lack of awareness and regulatory support, there are signs that ESG is gaining traction in Latin America. In recent years, there has been growing interest from international investors in the region. As these investors place greater emphasis on ESG criteria, local companies are likely to face increasing pressure to adopt ESG practices to remain competitive and attractive to become targets of international buyers.

ESG in M&A due diligence

Incorporating ESG factors into the M&A due diligence process is critical for assessing the risks and opportunities associated with a potential acquisition. ESG due diligence provides investors with insights into how well a target company manages its ESG practices, which are increasingly considered essential indicators of long-term performance and sustainability.

However, the integration of ESG criteria into M&A due diligence is still relatively underdeveloped in Latin America. Traditional due diligence processes often focus on financial performance, regulatory compliance and legal (mostly labour) and tax liabilities, without giving adequate attention to ESG factors. As a result, many potential ESG risks go unnoticed, which can lead to significant issues post-acquisition, such as reputational damage, regulatory fines and operational disruptions.

One of the key challenges in applying ESG due diligence in Latin America is the lack of standardised reporting and disclosure practices. In more developed markets, such as the United States and Europe, companies are often required to provide detailed reports on their ESG performance, including data on carbon emissions, diversity and inclusion, labour practices and governance structures. In Latin America, however, such disclosures are not mandatory for most companies, which means that much of the necessary information must be gathered through direct engagement with the target company.

To address this challenge, investors should tailor their due diligence processes to focus on the specific ESG risks and opportunities relevant to the target company’s industry and region. For example, in sectors such as mining, agriculture and energy, environmental factors such as water usage, emissions and land degradation are likely to be key areas of concern. In the consumer goods or technology sectors, social factors such as labour practices, supply chain transparency and data privacy may be more critical.

Investors should also consider the governance structures of the target company, particularly in relation to transparency, ethical practices and gender diversity in boards and management teams. In Latin America, where corporate governance can sometimes be opaque or influenced by political factors, a thorough examination of governance practices is essential to ensure that the company operates with integrity and is prepared to comply with both local and international regulations.

By conducting comprehensive ESG due diligence, investors can not only identify potential risks but also uncover opportunities to create value through improvements in sustainability and social responsibility. For example, an investor may discover that a target company has strong environmental policies but weak social or governance practices. In such cases, the investor may be able to implement changes that enhance the company’s overall ESG performance, thereby increasing its value and competitiveness.

Negotiating contractual protection

Once ESG due diligence has been completed, the findings should inform the negotiation of contractual protections in the M&A transaction. Representations and warranties, as well as indemnity provisions, can be tailored to address specific ESG risks that were identified during the due diligence process.

For example, if the due diligence process reveals that the target company has significant environmental liabilities, the buyer may negotiate specific representations and warranties related to environmental compliance, emission levels or waste management practices. Similarly, if there are concerns about labour practices or supply chain transparency, the buyer may seek contractual protections to ensure that the company complies with relevant labour laws and ethical sourcing standards.

In some cases, buyers may also negotiate post-closing covenants that require the target company to improve its ESG performance over time. For example, the buyer may require the company to achieve specific carbon reduction targets, enhance its diversity and inclusion policies or improve its governance structures. These covenants can be tied to financial incentives, such as earn-outs and performance-based bonuses, to ensure that the company remains committed to improving its ESG performance.

In Latin America, where regulatory frameworks and their enforcement may be less robust, contractual protections play an even more critical role in mitigating ESG risks. By clearly outlining the ESG expectations and obligations of the target company in the transaction agreements, investors can protect themselves from potential liabilities and ensure that the company is aligned with their sustainability and ethical standards.

Post-closing integration of ESG strategies

The post-closing integration of ESG strategies is one of the most important aspects of ensuring the long-term success of an M&A transaction. After the deal is completed, it is essential to align the target company’s ESG practices with those of the acquiring company, particularly if the acquirer has more advanced sustainability or governance standards.

In Latin America, post-closing integration can be particularly challenging, as many companies in the region are still in the early stages of developing their ESG frameworks or subject to other needs that are perceived to be more urgent. As a result, the acquiring company may need to invest significant time and resources into educating the target company’s management and workforce on the importance of ESG and helping them implement the necessary changes.

The first step in post-closing integration is to conduct a comprehensive assessment of the target company’s existing ESG practices and identify areas for improvement. This assessment should cover all three pillars of ESG – environmental, social and governance – and should involve input from key stakeholders, including management, employees and external consultants.

Once the assessment is complete, the acquiring company should develop a detailed action plan for integrating ESG practices into the target company’s operations. This plan should include specific goals and time frames for improving ESG performance and clear metrics for measuring progress. For example, the plan may include targets for reducing carbon emissions, improving worker safety and enhancing transparency in governance practices.

In addition to setting goals, the acquiring company should provide the target company with the tools and resources needed to achieve these goals. This may involve investing in new technologies, implementing training programmes for employees and hiring additional staff to oversee ESG initiatives. In some cases, the acquirer may also need to establish new governance structures, such as an ESG committee or dedicated sustainability officer, to ensure that ESG considerations are integrated into decision-making at the highest levels of the company.

One of the most important aspects of post-closing integration is ensuring that the target company’s management understands the value of ESG and is committed to making the necessary changes. This may require cultural shifts within the company, particularly if ESG has not previously been a priority, which is not an uncommon occurrence in Latin America. The acquiring company should work closely with the target company’s leadership to communicate the benefits of ESG, not only in terms of regulatory compliance but also in terms of long-term value creation and risk mitigation.

Finally, it is essential to establish monitoring and reporting mechanisms to track the target company’s progress in implementing ESG initiatives. Regular reporting on ESG performance, both internally and externally, will help ensure that the company remains accountable to its stakeholders and stays on track to meet its sustainability goals. These reports can also be used to communicate the company’s progress to investors, regulators and the broader public, thereby enhancing its reputation and market position.

Conclusions

The integration of ESG criteria into M&A is no longer a secondary consideration but a fundamental aspect of investment decision-making in Latin America. As global investors increasingly prioritise sustainability, transparency and social responsibility, companies in Latin America must adapt to these new expectations or risk being left behind.

Latin America presents both unique challenges and significant opportunities for ESG integration. While the region faces hurdles such as limited awareness, inconsistent regulatory frameworks and a lack of standardised reporting, there is also growing momentum toward adopting ESG practices, driven by international investor interest and the region’s abundant natural resources.

In sectors such as renewable energy, agriculture, healthcare and technology, ESG criteria are becoming critical differentiators that can enhance a company’s attractiveness to investors and improve its long-term resilience. Companies that embrace ESG as part of their core strategy – rather than viewing it as a compliance requirement – will be better positioned to navigate the complexities of the global market and capitalise on emerging opportunities.

For investors, incorporating ESG factors into the M&A process – from due diligence to post-closing integration – offers a way to mitigate risks, enhance value and contribute to the sustainable development of the region. Whether through exclusionary screening, best-in-class selection, impact investment or active ownership, investors can play a key role in driving positive change in Latin America’s business landscape.

ESG is not just a trend – it is a strategic imperative for both companies and investors in Latin America to help the region develop and enhance the well-being of the local population. By integrating ESG into every stage of the M&A process, from initial evaluation to post-acquisition integration, businesses can not only achieve financial success but also contribute to a more sustainable, equitable and transparent future for the region.

Endnotes