How Strengthened Governance Can Contribute To The Post-Pandemic Recovery In Latin America: Podcast Roundup – Corporate/Commercial Law

As the world continues to deal with the COVID-19 pandemic,
several challenges have become more visible globally, along with
major opportunities for a transformative and sustainable economic
recovery in the long term.

The Latin America region is no exception. The region continues
to be hit hard by the pandemic, not only in terms of public health
but with respect to economic, social, and political effects as
well. However, the International Monetary Fund forecasted 4.6%
economic growth for the region in 2021 and some sectors, such as
infrastructure and fintech, have emerged during the crisis as
attractive investing opportunities.

As we look towards the future, the focus now should be on how we
would like this recovery to proceed. The importance of
Environmental, Social, and Governance factors, or ESG, was
reaffirmed in 2020, as ESG-related products outperformed their
peers during the pandemic. In particular, companies have expanded
their disclosures regarding environmental issues and climate change
as investor focus on this issue has grown rapidly. This
has resulted in a proliferation of companies that generate
“sustainability ratings” and other ratings or scores that
evaluate companies’ ESG bona fides.

Though not discussed as often as the environmental component of
the ESG triad, the governance component encompasses major
opportunities for improvement in the current context of the Latin
America region, covering issues like prevention of corruption,
bribery and money laundering, as well as business ethics, all of
which represent major challenges in Latin America. If addressed
correctly, this could become an enormous opportunity for the region
to move toward a sustainable recovery.

In a recent interview, Sergio Moro and William Stellmach, shared
many insights on this topic. Here are some of the main
points discussed:

• Sergio expressed his view that the pandemic demonstrated that
  fighting and preventing corruption must be permanent endeavors. Due
  to the urgency required in dealing with the pandemic, there was
  some process flexibility in terms of controls over
  government procurement. As a consequence, some cases involving
  bribery were discovered in the purchases of ventilators, other
  supplies and even vaccines. The trend in fraud schemes also
  demonstrated the need to strengthen due diligence procedures.




• He explained that one of the major challenges for the Latin
  America region in preventing corruption, bribery and money
  laundering is still a lack of strong law enforcement practices.
  Sometimes law enforcement agencies lack the necessary resources,
  while others lack independence from political influence. A reform
  that improves the Courts’ and law enforcement agencies’
  independence, across the region, would be most impactful.




• Furthermore, in a scenario where there is a lack of strong law
  enforcement against corruption, the private sector plays a pivotal
  role. Companies need to realize that they could serve on the
  frontline against corruption. Building a strong anti-bribery
  compliance program is key to protecting companies against the risk
  of becoming embroiled in corruption or extortion. It is also
  important to keep in mind that companies based in Latin America
  could suffer charges and fines not only from the authorities in
  their own countries, but also from other foreign jurisdictions
  where they have operations or maintain any kind of business.




• In this regard, Sergio mentioned that, although ESG encompasses
  more than anti-corruption, a crucial part of governance in the ESG
  triad revolves around antibribery and anti-fraud compliance.
  Companies should develop strong policies and practices against this
  type of activity. ESG is also more than just complying with the law
  and avoiding risks against sanctions. ESG emphasizes the private
  sector’s proactive role in promoting a better world and, with
  that, increasing the market value of the company and the business.
  ESG means that the company needs not only to avoid illegal behavior
  but also to support a culture of integrity for its
  stakeholders.




• For these purposes, implementing a compliance program that
  works in practice is crucial. Achieving this usually requires a
  compliance department with autonomy and some level of protection to
  do the work that is necessary to prevent wrongdoing and to
  investigate incidents when they occur. The existence of a
  confidential channel and protections for whistleblowers against
  retaliation is also mandatory. Written anti-corruption policies
  will not work without commitment from company leadership.




• Sergio added that one of the benefits the pandemic brought is
  that it accelerated and widely diffused the use of technology in
  all fields, including in compliance programs. For example,
  forensics examiners increased their use of tools that support
  remote collections, data mining and cloud transfers, as well as
  technologies to conduct virtual interviews due to travel
  restrictions and sanitary requirements. These practices will be
  utilized long after the pandemic is over and these tools will
  continue to increase efficiency moving forward.




• William explained that ESG has the potential to be more
  impactful on Latin America than any U.S. regulatory regime. Even if
  the entity is not a U.S. issuer, if it is doing business with a
  U.S. company it can become an issue to the latter.




• Similarly, U.S. companies or investors contemplating
  investment, increasingly scrutinize their foreign partners. This
  isn’t a question of FCPA due diligence, which is often
  relatively discrete and straightforward. Rather, U.S. companies
  increasingly seek information regarding climate, diversity and
  inclusion, health and safety practices (not just meeting local
  standards), and a host of issues that were never at the forefront
  of the investment calculus. This is a sweeping trend, and it is
  going to be enforced by the regulated entities themselves through
  enhanced diligence and auditing.




• William added that ESG needs to be treated like any financial
  reporting metric. That means, conducting a risk-assessment,
  identifying what representations were made to investors or the
  public regarding ESG and assessing the entities performance
  against those statements.




• It is key to consistently, leverage the Internal Audit function
  to capture ESG and climate-related representations. From an
  oversight perspective, another proactive step is to identify which
  board committee will have the company’s ESG and/or
  climate-related objectives in its mandate.




• Finally, a number of clients are actively benchmarking against
  competitors. A number of ratings agencies essentially do that, by
  ranking companies against the progress made by competitors in
  specific sectors. It is important to evaluate what the competition
  is saying about their ESG commitments and how successful
  follow-through is towards those commitments.

Governance matters as well as environmental and social
considerations are foremost in the minds of stakeholders in the
market. Consumers of goods and services around the world are
now taking ESG considerations into account in their decisions.
Investors have understood the importance of ESG in the mitigation
of risks and sustainability of a business. Governments and
regulators have also reacted proactively to this call by regulating
for minimum requirements for companies and businesses to comply
with. It is no more a ‘nice-to-have’ matter but a matter of
how and when.

The recent global attention to and developments in ESG brought
by the pandemic represent a major opportunity for the Latin
American region, for both private and public sectors. The region
could take advantage of this accelerated pace and follow suit in
the promotion and implementation of effective and efficient
programs and tools that contribute to the region’s sustainable
recovery.

Listen to the full conversation here.

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