LATAM Sustainable Investing: A Q&A with Randy Bullard of Morrison Foerster
Interest in sustainable investing is rising. Climates suited to renewable energy projects, governments welcoming foreign direct investment and diverse deal opportunities have sustainability minded investors evaluating opportunities in Latin America. To provide insight into the region’s markets and due diligence considerations, Vcheck connected with Randy Bullard, a partner in Morrison Foerster’s Corporate Department and co-chair of the firm’s Latin America Desk.
What is the focus of your practice?
Our practice primarily focuses on foreign direct investment, mergers and acquisitions, private equity and venture capital into Latin America. We typically represent both strategic and financial investors from the United States, Europe and Asia in their investments into Latin America.
At what stage in the deal process do clients typically reach out to you?
Very early on. For example, today we’ve been engaged by an investor at the very beginning of a process when diligence hasn't even commenced to do an analysis of hot button issues. Common client questions include - What should we be looking at? How should we structure the diligence process? What outside advisors, including local counsels, should be engaged in-country to evaluate the target or the investment itself.
Green energy has been attracting tremendous investor attention globally. Is the majority of deal activity you're seeing in Latin America structured around the traditional trifecta of solar, wind and geothermal, or are eFuels like green hydrogen driving deals?
It’s still, from our perspective, part of the traditional trifecta. We're seeing a lot in the wind space in particular, but are seeing some solar deals as well. I think the others still are in their nascent stages. They’re still highly capital intensive. There are a lot of solar and wind projects that have been under construction for several years and are at the point in time in their development where an exit transaction makes sense for the founders or the sponsors. So I think the development trajectory of traditional assets dictates that they're still more popular at this point.
What markets are being overlooked?
I think Chile in particular, though I wouldn't say it was overlooked. I mean, there was a lot of regulation and legal activity in Chile that's making it an attractive market. I would think it would be more of the smaller countries. The big dogs in the ring, so to speak, are the ones that get the most attention because the assets are larger, the opportunities are greater, as well as the number of consumers that can be accessed. The smaller markets, Costa Rica, Panama and Peru to name a few, I think are somewhat overlooked, but that's more of a size of the market issue. It's certainly something that is still important in those regions, but for outside investors, they typically do target the larger markets, just for scalability and access to consumers.
What countries offer the smoothest landing for investors breaking into Latin America?
Each country has its own specific challenges and risks. A few years ago, I would say Mexico is the easiest point of entry, but certainly we've seen over time political change and certain populous initiatives and political moves that have made Mexico a more difficult investment target. Obviously it's an incredibly attractive market with 120 million people, NAFTA access and a tax regime that's very familiar to navigate for US investors. Each country is somewhat different and the challenge of investing in Latin America is the pace of political, economic and social change which is very rapid. Countries fall in and out of favor depending on current economic and macroeconomic indicators, as well as political change and political movements within the various countries. So it depends on the particular time. Obviously Venezuela and Argentina are the most challenging markets, just because of the inability to access capital that's been invested in the country and to repatriate it abroad and certain dysfunctionality in local operating regimes. But I wouldn't say that there are necessarily markets that are easier than others. There are particular challenges and different regulatory regimes to each country.
How does the due diligence intelligence that you receive, or even that the client shares with you, support your work?
It's critical to the process. I mean, it's what we do first. I was thinking about this earlier today and thinking about it in the context of ESG due diligence. For example, five years ago, ten years ago, there would have been pushback from a target or a seller in particular to doing anti-corruption diligence or to provide reps and warranties with respect to anti-corruption issues, the theory being that these countries and these local owners were not subject to US law. They had no ability to determine whether they were compliant or not. That argument and that hurdle has gone away. Now everyone accepts that. For example, anti-corruption, anti money laundering, sanctions and OFAC analysis is something that's done as a threshold matter at the beginning of a process. And that absolute reps must be given on these issues and that every investor, whether they’re from the UK or the US, or even in-country, expects these issues to be covered. Also the level of detail of the diligence [needed] has gone up. Usually outside advisors and accounting firms have their own arms now that do systems testing, internal controls, testing and risk assessment analysis on these issues. This is never an issue anymore. It's the first thing to do. It's part of the kickoff call and everyone knows it's coming.
What are one or two major compliance and reputational risks for ESG investment in Latin America that you always put in front of your clients?
Well, it's always anti-corruption and money laundering. It also depends upon the industry that you're in. We've done a lot of work on behalf of financial institutions that are investing in the region and obviously this is top of mind for them. For the PE investor and the VC investor, it’s also a priority since they're taking money from public institutions and they themselves may be a public institution so anti-corruption and anti-bribery is at the top of the list along with ESG. Let's not forget the social and government element of it too. Obviously child labor, labor conditions and supply chain issues are huge reputational issues for any large company or any PE company. So I think that those have come much more to the forefront. Do I enter the place and leave it in a better place when I leave? This is an important issue and a huge reputational issue, particularly for US investors.
Looking domestically at the countries and the region, do you think the COVID-19 pandemic played a role in raising awareness of ESG issues among both the general populations and the governments?
That's a very good question. Looking at how the economies are structured in most countries in Latin America, something like 45% of the population has what we call close contact jobs, meaning that they have to do it in person, they couldn't pivot to a virtual world and couldn't pivot to working at home. We saw it in Mexico at the very beginning of the pandemic where low income workers and even middle class workers had no choice but to go to work every day in a city of 20 million people during the middle of the pandemic. So things that affect workplace conditions and workplace operations also affect public health and national security. So by that token, and by that analysis, I think that definitely it's come to the forefront a lot more, knowing that this is really an issue of public health and one of great interest in the country itself.
March saw Chile become the first nation to issue a sustainability link bond with its interest pegged to the country's climate goal performance. Are you anticipating other countries in the region following suit?
I hope so. I mean, Chile has always been a bit novel in its regulatory reform and certain legislative initiatives that it has, so I expect that they will lead this process. I hope others do. It's a very interesting product and anything that will help grow the capital market locally is obviously desirable for lawyers. Hopefully we'll see more. The most important thing is to get the legislation right, and to get the regulations right around how these are issued, what they're supposed to do and how they're supposed to be measured. Hopefully there'll be some thoughtful processes around how to implement them locally.
The private sector is becoming more involved in the issuance of green bonds in Latin America. When these are being issued, investors need to evaluate the ESG credibility of the issuers. What reputational risks should investors be prioritizing when they're doing this issuer screening?
I think looking at it from a perspective of is this real, or is this a marketing ploy? Is this the type of company that can and should be issuing these bonds? I mean, we've all heard stories of companies that by definition what they do is bad for the environment, yet they're issuing green bonds. So I think there's a lot of skepticism about this product in particular and I think over the next couple of years, we'll see a lot more scrutiny on them as to how to measure performance, how to evaluate whether this is greenwashing, whether this is creating a product to improve reputational position in the marketplace versus something that's truly about environmental, social and governmental change. I think there's a lot of skepticism around them. I mean, we're seeing it even in the US with new SEC disclosures. It's important to get the measurement right, and to develop metrics and abilities, to evaluate that these companies are actually doing what they promised to do.
What obstacles are you and your clients typically facing when it comes to staying on top of Latin America’s rapidly changing landscape?
One, you've got to read about political events and legislative change and legal change in 20 markets. So it's a constant process of updating and staying on top of things and also the pace of changes is quick. If the IRS makes a change in the tax laws, there's a period of comment. There's a clear time for implementation and revision and careful consideration of the legislation. You know, you see it coming down the road, it's gonna come down the road for a year and everybody's prepared for it and there are clear rules on how to comply. In many jurisdictions in Latin America the changes occur overnight, the legislation has passed from one day to the next. There's no implementing regulations behind it. It's effective immediately and nobody knows how to comply or what to do to comply with the new laws so it's exciting but frustrating at the same time. It's just a constant process of staying on top of the market and talking to people. Before the pandemic, we spent a lot of time in-country in the larger markets. A lot of that was obviously client interface and seeing clients and visiting clients, but a lot of it is information gathering to make sure that we know what the hotspots are and what's coming down the pike as far as political or regulatory change. We have a lot of friends in a lot of places to make sure that we stay on top of it.
Columbia, Chile, and Brazil have elections planned for next year. Are you watching these closely?
Yes, very much so. We belong to several sorts of think tanks and quasi-governmental organizations that bring speakers in from time to time so we're on top of these, and you know, it depends on the direction of the wind and who you're talking to. You have to understand where this person fits in the macroeconomic world as to what their opinion will be on matters. So yes, we're watching elections very closely just because they're highly charged in all three instances. We’re also talking to people on the ground, typically lawyers. I like to think of us in some ways as canaries in the mineshaft. We hear from people first. Whenever there's concern over regime change, the clients call about a year in advance because they want to try to figure out alternative structures, diversifying their asset base, entering a new market, so we typically hear from people a long time before the elections start. It’s interesting to see that develop. My career has been long enough that I've seen three or four major transformative elections in Latin America. It's interesting from a client perspective, probably not from their individual perspective to have to worry about diversifying their asset base or potentially leaving their homes, but it's interesting for us to see how things eventually settle down, except in the case of Venezuela, unfortunately, that things always do get better. Like I said, the pace of change is such that as quickly as it can deteriorate, it can bounce back. This can happen in under a year, as we've seen in other markets like Brazil.
Aside from the topic of elections, are there any other upcoming regional events you're watching or you'd advise others to be keeping an eye on?
I don't think you could get bigger than the election in Brazil or the one in Columbia, given the candidates and some of their public rhetoric. It's pretty interesting stuff. Also, the constitutional convention in Chile is just fascinating from any number of perspectives. There's a lot of literature out there that this is a new left, that this is not a left. I, this is not me talking. I'm not sure if I agree with this, but at least this is what I'm reading, that this is a left that's not a communist left in the tradition of Cuba or even Venezuela, but this is a new left that talks about indigenous rights, women's rights issues of equality and inclusion that haven't been seen before in other leftist movements, so I think it'll be interesting to see how that works out and what happens. It will be interesting to follow in the sense that people are calling this new and it does have characteristics that we haven't seen before. It's not a 1930s leftist model or even a 1970s model. It's certainly a 21st century model.
Is the resumption of travel accelerating the pace of deals?
We started traveling internationally about two months ago which is exciting because our practice, as I mentioned, is very face to face. We need to see people face to face. You need to hear what they're thinking. You need to see what's happening in the street. You need to watch the local news. So for us, it's very exciting to be back traveling. I don't know if it's increased the deal making. We certainly were incredibly busy in 2020 and 2021, but I think that it's sort of getting back to normal and certainly we're seeing professional advisors back in their offices and in-country as well as people coming back to meet again, which is exciting and hopefully not going to take a step back. People are a lot more comfortable traveling. There is a relaxation of rules on entry and exit, not necessarily exit so much coming back to the US, but certainly for entry into Brazil. For example, they've dropped the testing requirement and other mask mandates and things like that. So it's become a return to normal, but obviously still, I keep my mask in my pocket at all times just in case, but I’ve definitely noticed a difference recently and I'm excited for that.
What does regional interest in ESG issues look like going forward?
The region is right for it. I mean as far as environmental issues, the impact of climate change in central America, that's happening immediately and has been happening for a couple of years, also with social issues. As I mentioned, given the nature of the economies locally and governments, issues around independent directors in particular were not a thing in Latin America two or three years ago nor were compliance officers, even ESG officers in the local companies. It's exciting to see this new development, but it's a region that's right for it and one that can benefit the most, again, with respect to working conditions, access to vocational training, diversity and inclusion. Certainly in countries like Brazil, it is coming much more to the forefront and for many good reasons. I think that you'll see that spread to other markets as well, but it's just a region that's multiethnic, and that has a demographic where the average age in many countries is in the early twenties. It's a young population. It's a technologically savvy population. It's also a population that cares about renewable energy and cares about access to energy and access to connectivity. So all of these issues with the young populations, with the growing populations, with the growing economies, it's just a very exciting place to be for these issues and probably the markets that can benefit from it the most.
For further insights on sustainable investing in Latin America, including areas to watch and their respective risk considerations, check out Vcheck’s article “Due Diligence Considerations for Sustainable Investing in Latin America.”
Editor’s Note: This transcript reflects minor changes to the recorded conversation for reader clarity.