Investments with environmental, social and governance (ESG) criteria in Mexico are growing fast and Afore XXI Banorte has been at the forefront of this movement. Issuers have attracted resources to promote projects that have sustainable impacts on the development of the country, and investors, especially those seeking long-term returns to savers, like pension funds, find it very attractive to promote projects and companies with ESG practices and objectives.
For an investor, ESG projects help in risk management, but importantly, in periods of accelerated development for such a market as we currently have here in Mexico, it can result in higher returns than other non-ESG alternatives. Additionally, companies and projects following ESG practices in general may perform better operationally, generating higher returns. And when large investors, like pension funds, adopt a cleaner and more sustainable investment strategy, former non-ESG issuers may also start adopting such criteria, which would boost their returns for investors.
Thus, portfolios incorporating ESG frequently perform better in the long term. For example, the firm Morningstar has found that over a period of 10 years, 80 percent of funds with sustainable investments outperformed traditional funds. They also found that 77 percent of the ESG funds that existed 10 years ago have survived, compared with 46 percent of traditional ones.
The issuer side
The Mexican government has greatly raised its issues of green bonds since 2020: its 131.6bn pesos ($7.5bn) of 2022 are equivalent to 16 times the amount issued in 2015. Since 2020 the public sector – federal government, state-owned enterprises and development banks – has increased its issuance of green bonds by 419 percent (see Fig 1).
Within this trend one can highlight the second issuance of BONDES G sustainable bonds by the Ministry of Finance and Public Credit (SHCP), the first issue in Latin America of a green bond by FIRA/Banxico, and Banobras’ placement of two sustainable bonds with a gender perspective, the first by a development bank devoted to infrastructure financing. The private sector has experienced a similar growth in recent years; the amount issued in 2022 represents 37 times that of 2017. In general, since the creation of labelled bonds, in 2016, they went from a share of two percent to 44 percent of the total debt issued in the market according to the Integrated 2022 annual report of the Mexican Stock Exchange (see Fig 2).
Regulation on ESG investments
This year the SHCP presented the Sustainable Taxonomy of Mexico, a key financial public policy tool that aims to encourage investment in economic activities that reduce social gaps and protect the environment in the country. The Sustainable Taxonomy of Mexico is a unique initiative worldwide, and considers social objectives in its design, defining gender equality as a priority objective.
The Sustainable Taxonomy of Mexico seeks to create a reliable classification system, legitimate, unified, and based on science that stands for the outline of economic activities that can be considered sustainable. The result will be an increasing investment in projects and economic activities that promote compliance with the country’s environmental and social objectives, reducing the risk of greenwashing. Its implementation is voluntary.
Previously, the pension fund regulator in Mexico, CONSAR, had also carried out in recent years a series of actions to incorporate into the legal framework obligations regarding ESG factors and the ways in which these have an impact on the risks and opportunities of the investment strategies developed by pension funds. Since 2022 it is mandatory for social security pension funds to take into consideration ESG criteria in the process of investing the retirement savings of their clients.
The investor side
Regarding some of the first impacts of the regulation, according to CONSAR reports, in 2022 the AFOREs (Retirement Fund Administrators) invested 110.4bn pesos ($6.3bn) in ESG bonds, while in 2021 they had invested only 1.1bn pesos ($62m). Afore XXI Banorte, the largest pension administrator in Mexico and in Latin America, has been a pioneer in the implementation of ESG criteria, even before the new regulations, and may claim to be the leader of the industry on this aspect of investments. To start with, Afore XXI Banorte’s objective is to promote the implementation of ESG practices in the operating processes of the promoted firms and projects in its portfolio.
Thanks to this, 20 large issuers from diverse sectors have signed engagement letters regarding the incorporation of ESG factors into their businesses in order for XXI Banorte to provide long-term funding to them.
Furthermore, due to the ESG criteria implementation different social impact strategies have been promoted – educational projects, donations, workshops, development programmes, and others – that have benefited millions of people.
And it has made a difference in the Mexican economy. For instance, through investment in sustainable electricity production Afore XXI Banorte helped to generate more than 1,112mw per year, equivalent to 3.4 percent of the installed energy capacity nationwide. The company also supported the construction of 2,398km of highways and paved streets, equivalent to 1.4 percent of the National Road Network. It funded producers of 47,740 tons of harvested foods for human consumption; contributed to the generation of 1.62 million jobs (direct and indirect), that is, nearly three percent of the Mexican economically active population.
In addition, it has exhaustively promoted gender equality and equal opportunities both in Afore XXI Banorte and in the companies financed. Through its investments in Structured Equity Securities (CKDs), it has allowed the granting of credits to 2,123,695 women to start their own businesses, among other examples of the impacts of Afore XXI Banorte’s ESG investment strategy.
Afore XXI Banorte’s objective is to promote the implementation of ESG practices
Among its goals for 2030, Afore XXI Banorte considers that 50 percent of the projects in the real estate sector in which it invests will have to incorporate some kind of sustainable building certification. With regards to its carbon footprint, the Afore will increase its investments in issuers that disclose information of carbon emission practices to 80 percent, including reduction goals and strategies to reduce carbon emissions. In terms of water, the company will raise to 80 percent the selected issuers that disclose practices of water consumption and involvement in the supply chain.
And regarding the inclusion of women, 30 percent of the portfolio on corporate instruments must be on companies that have at least 30 percent of women participating in their boards, by 2030.
As of December 2022, Afore XXI Banorte’s investments in sustainable financial instruments according to ESG criteria were 22.7bn pesos ($1.3bn) in thematic bonds, 8.5bn pesos ($485m) in Sustainable Exchanged Traded Funds (ETFs) and 22.8bn pesos ($1.3bn) in alternative instruments.
All of this has helped Afore XXI Banorte position itself as the leading Afore in the market for providing competitive, reliable, and timely services, as well as for improving the performance of its retirement fund portfolios, under a responsible investment strategy. We reaffirm our position in developing sustainability by being active investors in instruments that generate positive impacts on society and the environment.