The Importance of Corporate Governance for Development Finance in Latin America

Despite globalization, capitalism still fails a significant portion of the global population. The World Inequality Report 2022 indicates Latin America is one of the most unequal regions in the world, with the top 10% capturing 55% of national income and owning 77% of wealth, compared to 36% and 58% in Europe.

Perceptions of corruption remain persistently high in all but a few of the region’s economies, and the region has been facing an unprecedented migrant crisis.

Latin America and the Caribbean have suffered harshly from the economic contraction brought about by the Covid-19 pandemic: capital flows ceased, mobility halted, and trade collapsed. Employment rates fell dramatically, with women particularly affected. According to the IDB 2022 Latin American and Caribbean Macroeconomic Report, the region rebounded strongly in 2021, with a higher-than-expected GDP growth of 6.8%, and fairly curbed a further rise in inequality. However, growth projections in 2022 are amongst the lowest in the world, which may exacerbate pre-existing social tensions. Perceptions of corruption remain persistently high in all but a few of the region’s economies, and the region has been facing an unprecedented migrant crisis. Furthermore, the Russia-Ukraine war has added complexity and uncertainty on a global scale, which may also impact the region’s recovery.

These challenges are also intensified by the fact that Latin America and the Caribbean is one of the world’s most climate vulnerable regions. The IDB estimates that responding to the climate crisis requires between 7% to 19% of annual GDP in 2030, representing from between US$470 billion to US$1,300 billion in infrastructure and social spending with sustainable, resilient, and decarbonized development goals. The large-scale droughts in Brazil in 2021 and early 2022, and the two hurricanes that hit Central America in 2020 affecting over 4.5 million people are just a few examples of recent destructive extreme weather events across the region. Changing precipitation patterns and increasingly abnormal temperatures are particularly impactful for the region’s agricultural sector, whose inputs are already under immense cost pressure stemming from supply chain challenges of the pandemic and the ongoing conflict in Ukraine.

There exists a great opportunity to mobilize global sustainable investment resources in the region that currently receives only a small percentage of the global market.

These challenges require significant investment to enable a speedy recovery in the region which both balances the urgency of a crisis response with the need to invest in long-term resilience and sustainable development. Development finance institutions are uniquely positioned to help the region overcome the challenges, with financial products and services aimed to both the public and private sectors that promote development and help markets advance and grow. Furthermore, there exists a great opportunity to mobilize global sustainable investment resources in the region that currently receives only a small percentage of the global market which is estimated to exceed $50 trillion by 2025.

Facilitating financing flows that generate, in addition to financial returns, measurable impacts on social and environmental development is vital.

Facilitating financing flows that generate, in addition to financial returns, measurable impacts on social and environmental development is vital. Thematic bonds are one response:  bonds which can be green, social or sustainable. Their main characteristic is that the funds raised are directed to finance the Sustainable Development Goals (SDGs) of the 2030 Agenda and the Paris Agenda, and are also aligned with international standards, such as those of the International Association of Capital Markets (ICMA), which include transparency requirements regarding the use of funds.

Corporate governance is an essential proposition of development finance, to assist in selectivity and ensure that funds are invested in clients who share values and goals, operate with integrity, environmental and social responsibility and contribute positively to society. The very concept of corporate governance has evolved significantly over the last few years. Until recently, corporate governance had been mostly focused on the company, and on the optimization of benefit to the company and its shareholders, with indirect, limited regard to corporate externalities.

A multifaceted approach to corporate governance can drive financing of sustainable development in Latin America and provide greater access to capital.

Today, however, corporate governance necessarily encompasses a definition of a company’s purpose, aligned with its impact on the wellbeing of society and the environment, as well as the company’s board and leadership’s accountability and oversight, stakeholder engagement, climate governance and all aspects of ESG risk governance. Good corporate governance is associated with virtuous leadership, effective resource stewardship, improved organizational resilience, and higher long-term shareholder value generation that ensures alignment of purpose, strategies and activities.

A multifaceted approach to corporate governance can drive financing of sustainable development in Latin America and provide greater access to capital. Although globalization has not benefitted regions equally around the globe, the mobilization of sustainable capital in poorer regions is one route to a more responsible form of capitalism.

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Marta Viegas is Head of Corporate Governance at IDB Invest.

Christopher Burt is a Corporate Governance Consultant at IDB Invest.

This article is from the special issue of the ECGI Blog on Corporate Governance in Latin America including articles from  Francisco Reyes Villamizar & Aurelio Gurrea-Martinez.

This article reflects solely the views and opinions of the author(s). The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.

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IDB Invest, the private sector arm of the Inter-American Development Bank, has the purpose of financing enterprises to promote the economic, social and environmental development of Latin-American and the Caribbean. In addition to investing its own capital, IDB Invest is focused on mobilizing funds from international and local impact investors, utilizing its capacity, reputation and regional knowledge to de-risk operations and attract investment to the region.

IDB Invest is supporting an inclusive and sustainable recovery through its Vision 2025 roadmap, which has “Good Governance and Institutions” as one of its three main strategic objectives. Corporate governance is a strategic pillar of IDB Invest’s work because it has long been associated with investor confidence, leading to improved trust in the markets, greater access to financing and reduced cost of capital. It is, therefore, an essential element of sustainable development and of vital importance for encouraging capital mobilization.

In IDB Invest, corporate governance analysis is embedded in every transaction, to assist in selectivity and ensure that funds are invested in clients who share values and goals, operate with integrity, environmental and social responsibility and contribute positively to society. Its approach to corporate governance has evolved from risk-identification and mitigation to also identifying additionality opportunities to assist clients further build and strengthen their practices, which have knock-on benefits relating to their sustainability practices. Through employing sophisticated corporate governance, clients have the structures required to achieve meaningful corporate action and accountability for their environmental and social impacts.

IDB Invest works closely with clients to understand their governance systems and develop corporate governance action plans that are tailored and fit-for-purpose, with the understanding that corporate governance is flexible and proportionate to the characteristics of each client and the market they are situated in. This work is dual-functional, assisting IDB Invest to make informed investment decisions, and aiding clients identify governance improvements and opportunities.

IDB Invest also arranges and coordinates specialized initiatives that promote the adoption of transparency and good corporate governance practices in selected companies and markets, including providing technical advisory work and developing knowledge products and trainings. For example, IDB Invest has recently worked with local corporate governance institutes in Ecuador and Jamaica to assist the development and dissemination of the respective countries' new corporate governance codes, designed to be both educational for local companies, including SMEs, and proportional to the current levels of governance standards in the markets. Clear and tailored country codes have the double effect of raising local practices towards global standards and providing more information and confidence to investors.

Developing markets is a key objective of IDB Invest in its pursuit to encourage the mobilization of sustainable capital more widely in the region. Part of this development includes promoting the adoption of innovative financial products such as thematic bonds, which accompanies IDB Invest’s direct involvement in financing such bonds in the region. Corporate governance is always a primary focus, as robust practices by issuers mitigate risks and promote a more transparent and accountable relationship with bondholders. IDB Invest recently launched a guide to ‘Financing Sustainability through Capital Markets’ aimed at assisting both first-time and current issuers of thematic sustainability bonds.

Taken together, IDB Invest’s multifaceted approach to corporate governance intends to drive financing of sustainable development in the region. Through embedding governance in both its client engagement and advisory work at, IDB Invest is working to foster companies and markets across the region which exhibit higher standards of governance, providing the foundation towards greater sustainability and access to capital.

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IDB Invest Sustainability Week 2022 “From Thinkers to Doers” will focus on tangible business and growth opportunities for the private sector, providing a platform for global and regional leaders to share solutions, best practices, and tools that drive sustainable impact.