An increased focus on ESG issues among Mexican companies has provided a tremendous opportunity for law firms there to expand their practice offerings in this area to better help clients
In a world increasingly focused on environmental, social & governance (ESG) standards, businesses are grappling with the challenge of aligning their operations and corporate strategies with these principles. This fast-growing interest to comply with ESG practices, to some extent, can be stalled by a country’s legal framework — such is the case of Mexico.
While Mexico remains a hub for multinational corporations, today laws still lag market demand from businesses to have a clear ESG structure in which to operate. This becomes particularly complicated, as the existing legal framework that currently regulates some ESG matters is considered overly broad and complex.
Despite this, there is still evidence of robust ESG disclosure by Mexican companies. For example, a study by the International Federation of Accountants (IFAC), which included the 148 companies listed on the Mexican Stock Exchange (BMV), found that 62.2% of these companies provide quality ESG information through annual reports, sustainability reports, or integrated reports.
Mexico’s ESG business landscape is evolving quickly
One challenge that businesses face in Mexico is the lack of frameworks that serve as benchmark for ESG standards or clear processes regarding implementation, disclosure, and comparability, according to Gerson Vaca Avendaño, partner of the ESG practice at the Mexican law firm Basham, Ringe y Correa. However, the country’s business dynamics and commercial environment are advancing at a faster pace than the legal framework, Vaca Avendaño said, adding also that regulatory bodies have demonstrated a strong dedication to and synchronization with sustainability principles in Mexico.
Indeed, stakeholders responsible for shaping financial and regulatory policies are actively advocating for the integration of these concerns into their business operations and risk assessment models, despite the lack of legal rules. Further, the BMV asks companies to disclose certain ESG information, which is divided into environmental performance, human resources, and administration in their annual reports. Nevertheless, companies are not obligated to harmonize this information with any non-financial reporting framework, according to the IFAC.
There are important advances regarding the uniformity of sustainability-related information and metrics, however, such as the introduction of the new Mexican Sustainable Taxonomy. Although not legally binding, the taxonomy represents a first step for standardization by classifying economic activities that have positive environmental and social effects. Further advances are the General Norms for the Disclosure of Sustainability Information — issued by the Mexican Counsel of Financial and Sustainability Norms — which will create congruence with the existing financial reporting and disclosing requirements. The Norms will become effective on January 1st, 2025.
ESG as an emerging practice area
According to Vaca Avendaño, much of what is beginning to be seen and practiced in Mexico comes from policies and commitments originating with companies from other countries. Many multinationals set their ESG standards in line with the legislation of their home country and international practices, but global corporations’ policies cannot always be straightforwardly implemented in Mexico as they were originally designed. In these cases, policies must be adapted with the help of experienced lawyers to fit the local legal framework.
Another aspect related to ESG issues relates to foreign companies often requiring assistance to understand all the laws with which they must comply when operating in Mexico, prompting Mexican law firms to collaborate with experts from various fields. Other emerging ESG issues for law firm clients involve sustainable finance, green projects, and bonds, as well as financial inclusion, consumer protection, digital corporate responsibility, governance and compliance, supply chain issues, and avoidance of greenwashing.
Additionally, a potential business opportunity for law firms in Mexico is the lack of ESG awareness that persists among small and midsized businesses that exclusively operate in the country. Encouragingly, this trend is changing as an increasing number of local businesses recognize the financial, competitive, and commercial benefits of embracing these types of practices.
In fact, client demand around ESG compliance is real, too. Clients are seeking those law firms that not only help them align their business activities with ESG principles but also put those principles in practice within the firms themselves. Not surprisingly, Basham, Ringe y Correa is currently focusing on the social sphere with particular emphasis on diversity, inclusion, and gender equality, Vaca Avendaño said.
He further explained how fellow legal professionals in private practice can build their books of business by venturing into the dynamic world of ESG, emphasizing how professionals should pursue personal interest and specialization in ESG issues that resonate with them. He also suggested staying updated through interdisciplinary communication between the different areas within law firms and social media sources like LinkedIn and podcasts to adapt to the rapidly evolving ESG landscape. Finally, he recommended staying creative and evaluating how new ESG updates can fit into your clients’ needs.
Despite the important advancements in Mexico to improve the ESG landscape, the lack of knowledge and understanding of ESG can create challenges for companies and opportunities for law firms there.
For companies, specifically, the first step in devising an ESG strategy is to conduct a materiality assessment to uncover key issues and risks across groups of stakeholders. Another key requirement is doing a review of all public information to assess the risk of greenwashing (or any other washing). And while many companies do not understand what greenwashing is and which practices may be considered as greenwashing, misunderstandings in this area can create potential liabilities with their clients and consumers, in addition to reputational harm for the company.
Clearly, companies based in Mexico may need help in both of these areas and more, and law firms are well-positioned to offer this kind of help in carrying out a materiality assessment and identifying any potential litigation risks for greenwashing.
The increasing necessity of companies in Mexico to meet ESG compliance obligations, as well as more sophisticated regulation for sustainability disclosures, remain growth opportunities for law firms. In order for law firms to take advantage of them, however, they should leverage the broad applicability of ESG components in their legal practices to provide integrated and optimal solutions to their clients.