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Article12 Apr 2021

A Look at the "E" in Latin America's ESG Prospects

As Environmental, Social, and Governance (ESG) factors increase in importance for investing, Citi's Latin America economics and strategy team explores the effort in Latin America in a recent report. Despite the region’s lower emissions and lower dependence on fossil fuels than many other emerging markets, we summarize why the team thinks that Latin America’s path toward addressing the “E” part of the ESG agenda remains a long one that that will require ongoing commitment, particularly as relates to key economies in the region.

While Latin America is not a big contributor to emissions, it also is not a leader among emerging markets (EMs) in the drive to curb climate change. Latin America overall is responsible for 7.5% of total global greenhouse gas (GHG) emissions, slightly higher than its share of GDP (6.5%). To put that in perspective, Latin America as a continent has an emissions share that is similar to that of the country of India, although its economy is double the size. A further breakdown of the region reveals the following:

  • Brazil has the biggest gap between its share of GDP (2.5%) and its share of emissions (3.0%) and now ranks among the top ten GHG emitters globally (see Figure 1).
  • Mexico and Argentina have emission rates that are close to the size of their economies in terms of share of GDP (see Figure 2).
  • Most of the rest of the region emits less than its share of GDP (see also Figure 2).

As noted by Citi’s economists and stretgists, the biggest “polluters” in Latin America are Brazil and Mexico, with Brazil accounting for 3% of global GHG emissions (and 40% of Latin America emissions) and Mexico half that level. However, Brazil has made some progress with GHG emissions by lowering deforestation and forest fire prevalence.  Mexico's emissions, on the other hand, have not shown improvement so far. While other Latin America countries have made important strides in lowering emissions (e.g., Costa Rica has shifted almost completely to renewable energy generation), the size and impact of Brazil and Mexico mean that they are key determinants to progress.

Figure 1. Top Ten Global GHG Emitters Now Include Brazil

 

Figure 2. Brazil Leads Latam to Issue More GHG Than Its Share of GDP

 

Source: Climate Watch Data and Citi Research

 

Source: Climate Watch Data and Citi Research

 

Comparatively, Latin America has a better starting point than other EM regions given that it has a lower dependence on fossil fuels for energy generation (see Figure 3). Natural gas and hydro are the main sources of energy generation in Latin America. Coal and oil generation combined account for no more than 20% in all countries except Chile. By contrast, in Asia, countries such as China and India rely on coal for over 65% of energy generation.

Figure 3. Latin America Has Relatively Low Fossil Fuel Use

Source: IEA, Citi Research

 

Several countries in Latin America also have committed to net-zero emissions by mid- century. Under the Paris Agreement (a legally binding treaty on climate change), countries have committed to limiting global warming to below 2 degrees Celsius (preferably 1.5 degrees) by the second half of the century. To achieve this goal, they have agreed to reduce carbon emissions, pledging to achieve “net-zero” emissions (the level at which human-caused greenhouse gas emissions are balanced by carbon removal) by a specific target date (see Figure 4).

 

 

Figure 4. Net-Zero Emissions Targets for Latin America

Country

NZT?

NZT Year

Status

Share of GHG

         

Brazil

Yes

2060

In Policy Document

3.01%

Chile

Yes

2050

In Policy Document

0.11%

Colombia

Yes

2050

In Policy Document

0.57%

Costa Rica

Yes

2050

In Policy Document

0.02%

Dominican Republic

Yes

2050

In Policy Document

0.08%

Panama

Yes

2050

In Policy Document

0.05%

Argentina

Yes

2050

In Political Pledge

0.84%

Uruguay

Yes

2050

In Political Pledge

0.07%

Mexico

No

 

 

1.47%

Peru

No

 

 

0.39%

Ecuador

No

 

 

0.19%

 

Source: Climate Watch Data and Citi Research

 

Despite this environmental commitment, Citi's economics and strategy team notes that Latin America faces challenges in both the social and governance dimensions of ESG. Investors in EM, and Latin America in particular, are familiar with the social and governance issues that come into play when investing in these markets. The team highlights the structure of labor markets, poverty, and inequality as among the social factors that investors need to consider. They also note that sovereign/governance risk analysis has traditionally taken into account the institutional setup of a country, the effectiveness of the government, political stability, and the rule of law. Indeed, they point out that in Latin America, changes in some of these variables can determine economic and market outcomes more often than changes in traditional economic indicators.

Environmental factors, however, are receiving increased attention. Given increased urgency and widespread global efforts to limit climate change, interest in benchmarking countries and gauging where they are in terms of this risk and their actions to mitigate it has increased. Citi's Latin America economists and strategists note that ESG scores can be significant determinants of the level of sovereign spreads beyond the traditional macro, credit, or market variables. In the team's view, a thorough understanding of the “E” factor is increasingly necessary as climate-related risks and costs (the latter related to both prevention and recovery) gain prominence in the economic outlooks of countries in the region.

Despite Latin America's better starting point for energy transition given its lower dependence on fossil fuels than other EMs and the efforts of many countries to limit climate change, Citi's team notes that the commitment and policies of Brazil and Mexico continue to play a key role in the region's progress with regard to "E" goals.

For more information on this subject, please see Latin America Economic Outlook & Strategy - The State of Environmental Prospects in Latam.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.

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