ESG integration for ETF mandates in Mexico

This week we are zooming into ESG integration for ETF mandates in Mexico.

There is a great variety of ETFs available today that cater to different preferences and investment goals. What happens when investors have ESG commitments but want to buy ETFs? In other words, what happens when ETF investors want to align their financial goals with sustainable and ethical practices?

There are close to 1,600 ESG ETFs globally that were valued at US$415 billion (according to Morningstar) as of 3Q23. 95% of them are based in 5 countries: Ireland, US, Luxembourg, Canada, and Australia. Currently, Mexico’s ETF market offers a diverse array of options tailored to various investment preferences and objectives. However, when it comes to ESG-focused ETFs, the landscape is relatively sparse. With only a couple of such ETFs cumulatively valued at US$1.95 billion, Mexico’s presence in the global ESG ETF arena is notably modest. Naturally local investors can buy from all global ESG ETFs, but why aren’t there more ESG-focused ETFs in Mexico?

We think the biggest barrier is probably the lack of high quality ESG information in the market. Without clear and consistent metrics to assess ESG performance, investors face challenges in evaluating the sustainability credentials of potential investments. As we have discussed in the past, there needs to be an improvement in having clearer, more standardized ESG reporting frameworks to simplify ESG performance assessments.

This absence of data, coupled with complex liquidity constraints, presents a significant barrier to the development of a robust ecosystem for ESG-focused ETFs in the country. It also means that the existing local ETFs are more focused on Mexican blue-chips, which are liquid and reliable, despite actual ESG issues and data. Hence, these ETFs are not very different from any other Mexican ETF.

Source: Bloomberg

Despite these challenges, there is hope that the landscape will evolve over time. As global standards for ESG reporting continue to mature, and awareness of sustainable investing grows, Mexico is poised to witness a transformation in its ETF market too. With a more comprehensive and transparent ESG framework in place, investors will have access to a broader spectrum of ESG-focused ETFs, allowing them to align their investment strategies with their values while diversifying their portfolios. Hopefully, over time this will mean that investors will be able to buy a more representative sample of the Mexican market with an ESG filter.

I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.

Best,

Marimar

CEO, Miranda ESG