ESG regulation tightens in Mexico and worldwide
ESG criteria is transforming business consulting services in the face of increasing regulation in Europe, Latin America and Asia.
Since ESG criteria became relevant in the business discourse, different legislations around the world have implemented regulations on the subject, which have had the effect of making them binding and meaning that corporate obligations in environmental, social and governance matters are no longer mere good faith corporate commitments. At the same time, this compliance is beginning to be monitored by the authorities.
Examples of this are the French and German regulations on due diligence, approved in 2017 and 2021, respectively. The regulations of these countries were pioneers in requiring due diligence mechanisms from large companies, involving the supervision and compliance with human rights throughout their supply chains. Thus, extraterritorial responsibility schemes were introduced for national companies with operations in other countries. This has had regional repercussions, since the European Union is already planning the first proposal for such a procedure in corporate sustainability, as of February 23rd, 2022.
The objective of this transnational regulation is to promote sustainable and responsible business behavior, which will anchor human rights and environmental considerations in the operations and corporate governance of companies.
In this regard, in Europe, other regulations have recently been proposed that are closely related to ESG criteria. Some examples are the “Nature Restoration Act” and the “European Directive on Corporate Reporting on Sustainability“, which expand environmental and sustainability obligations for companies in that region. Regarding the Nature Restoration Act, it incorporates a collaboration scheme between States and companies in the restoration of ecosystems and fauna in danger of extinction. The second regulation extends sustainability reporting obligations to large and medium-sized companies that are listed on the stock exchange, which means that companies that wish to be listed or are already listed must strengthen their actions in the areas of equality and inclusion, human rights, the environment, and the fight against corruption.
Another example of how ESG criteria are being tightened around the world is the measures announced by the US Securities Exchange Commission (SEC) of the U.S. Government. In June 2022, the SEC announced a series of measures to sanction corporations that misrepresent their ESG implementation and actions. In this regard, the SEC has already fined New York Mellon Corp for stating that it complied with these criteria without demonstrating to the authority the standards used to do so. The SEC considered that it was false information because it had no verifiable support; likewise, the U.S. financial regulator is currently investigating Goldman Sachs Group Inc. for considering that its mutual funds do not meet the ESG standards required by Wall Street. These actions and measures are part of the recent campaign promoted by the SEC to combat money laundering and social washing by large companies.
In Mexico, this regulatory trend is no exception. In 2020, the General Law Initiative on Corporate Responsibility and Corporate Due Diligence was proposed in the Senate of the Republic, the first of its kind in Latin America, seeking to domesticate the United Nations Guiding Principles on Business and Human Rights. It contemplates a regulatory scheme on social responsibility and human rights for companies in Mexico. In addition, it includes sanctions for those corporations that participate in acts that violate these rights. Also, in early 2022, the Federal Law for the Protection of the Cultural Heritage of Indigenous and Afro-Mexican People and Communities was enacted, which imposed a new set of obligations on companies that want to use designs from indigenous peoples in Mexico. This is leading to the need for new services such as social management and professional experts in the field of human rights.
However, it is the General Circular Economy Law Initiative, pending approval by the Chamber of Deputies, which warns that it will represent a paradigm shift with respect to the obligatory nature of ESG criteria in Mexico. This law, whose enactment seems imminent, incorporates circular economy schemes, forcing companies to integrate value-generating supply chains. Consequently, this will eventually lead to the incorporation of extended producer responsibility schemes, as well as to the dissemination of a culture of environmental co-responsibility among the population to achieve responsible consumption. Likewise, the ordinance project seeks to develop schemes for measuring carbon and water footprints, implying reporting obligations on the part of companies, especially those that generate highly polluting products such as plastic or glass, among others.
The renewal of the Free Trade Agreements with North America (TMEC) and soon, with the European Union (FTAEU), is accelerating the incorporation of these criteria into national domestic regulations. An example of this is the provisions of articles 23.6, 23.7 and 24.13 of the TMEC, where it is established that the contracting parties “recognize the importance of promoting corporate social responsibility and responsible business conduct“. This corroborates that ESG criteria will be indispensable in the immediate future for the establishment of business with other jurisdictions in the world.
Even countries that traditionally seem to reject this perspective have already taken significant steps in this area. Pakistan and China in 2021 and 2022, respectively, approved their National Action Plans on Business and Human Rights, incorporating a scheme of obligations to respect and promote human rights for both domestic and foreign corporations operating in their jurisdictions. This shows that even conservative countries are moving towards these schemes.
ESG criteria are transforming business consulting services because, in view of their growing regulation, the demand for specialized services in this area has increased considerably. However, as the supply of professionals with experience in this area is scarce, several companies have opted to create their own areas for their attention. The creation of figures such as the Chief Sustainability Officer or the Business & Human Rights Counsel, among others, are proof of this.
There is an old proverb that says that everyone looks for shade, but no one plants trees. The growing ESG regulations seek to transform this equation, representing a new paradigm for corporate management, as it forces the implementation of sustainable schemes of corporate co-responsibility with the environment, society, and good governance. In other words, we continue to seek shade, but we are obliged to plant more trees.
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Adalberto Méndez, partner of Business, Human Rights and ESG at ECIJA Mexico.