The Almighty Peso: Sustainable Investing in Mexico

"Companies are looking for the best place to invest. It's obvious that Mexico has been that place for North America." -- Bruno Ferrari, Mexico Minister of Economy

Last week, Bloomberg News reported that Mexico raised their foreign direct investment (FDI) inflow forecast to USD 20 billion for 2011, an 11 percent boost from the USD 18 billion estimate put forth by Finance Minister Ernesto Cordero earlier this year. While it may sound like an aggressively rosy outlook, it seems on target. On Thursday, EFE News reported that Mexico's FDI inflow through the first half of 2011 was down 13.3 percent compared to the same period last year, but that amount is still a robust USD 10.6 billion, with almost three-fourths of it coming from the United States. The manufacturing sector represented the biggest piece of the pie, with 37.7 percent; followed by financial services and insurance (21.5 percent) and commerce (13.8 percent).

POSITIVE EXTERNALITIES: POLLUTION HALOS, TRANSFERS, SPILLOVERS & LEAPFROGS

Domestic firms as well as foreign small and medium enterprises (SMEs) and venture capital start-ups casting domestic anchors downstream from Mexico-based multinationals (MNCs) can look forward to benefitting from several positive externalities as best-practice environmental management strategies work their way through the supply chains. Investors and businesses aligned early with the country's move toward sustainable industrial development will be better positioned as the market adapts to a low-carbon economy.

In their book The Enclave Economy: Foreign Investment and Sustainable Development in Mexico's Silicon Valley, Kevin P. Gallagher and Lyuba Zarsky, both researchers at the Global Development and Environment Institute at Tufts University, note that "FDI potentially delivers three types of spillovers for sustainable industrial development: clean technology transfer (transfer to MNC affiliates of production technologies that are less polluting and more input-efficient than those used by domestic firms); technology leapfrogging (transfers of state-of-the-art production and pollution-control technologies by MNCs that allow developing countries to leap to the global technology frontier); pollution halo (transfers to MNC affiliates and diffusion among domestic firms, including suppliers, of 'best practice' in environmental management)." However, the main crux of their book is in analyzing the failure of FDI to benefit the wider Mexican economy, instead creating an "enclave economy" that hampers, for example, any substantive transfer of eco-friendly technology.

GREENTECH, CLEANTECH & SOCIALLY RESPONSIBLE INVESTING

But for venture capitalists, failure in the wake of ham-fisted MNCs with underdeveloped or underexecuted CSR policies often signals opportunity for the fleet of foot — and finance. GreenTEK Ventures, for example, a Switzerland-based socially responsible investment and development fund manager with a focus on emerging markets, recently inaugurated their Mexico Fund I. With a goal to build to USD 100 million across local and international SRI investors, the fund will support projects that help mitigate the effects of climate change in Mexico. Earlier this year, the firm announced that they were exploring the first private geothermal project in the country.

"We have seen some very interesting developments in energy efficiency," said José Golffier, director of GreenTEK Ventures Mexico. "There are some great opportunities to be had because we’re not just talking about energy-saving light bulbs, we're talking about ultra-efficient equipment to generate electricity. And then there's the subject of renewable energies. Mexico has great potential in that sector, which is where we are seeing increased opportunities...We believe Mexico has what it takes to be one of the world’s leading players — natural resources, access to technology, legal framework."

SEARCHING FOR HARMONY AMID HIGH FDI, FRUSTRATING RESULTS

But perhaps that legal framework may not be strong enough to hasten positive externalities from taking root domestically. Claudia Schatan of the Economic Commission for Latin America and the Caribbean (ECLAC) and author of Maquiladoras and the Environment in Mexico, notes "inadequate public policies behind...frustrating results" like the inability of FDI to develop cleaner manufacturing processes, create high-quality jobs or introduce better management practices.

"In global markets bifurcated by environmental demands, developing countries -- and the MNCs that invest in them -- will need to strategically choose and align their environmental policies with their markets,” write Gallagher and Zarsky. "If they choose markets with lower standards, however, they may be at risk of being squeezed out if and when standards are globally harmonized."

Mexico receives more FDI than any other country in Latin America. With that comes a responsibility to ensure that corporations engage in sustainable and ethical practices that are aligned with best practices in environmental, social and corporate governance (ESG). Climate change and economic inequality are issues that can be effectively tackled by direct engagement as well as FDI spillover. But even as more businesses and investors push the environmentally conscious envelope, Mexican lawmakers must root out those inadequacies through changes in public policy. Foreign funds provide a big boost to Mexico's economy, but for those investments to engender real sustainable development, job creation and ESG growth, "El Congreso" also needs to play a leading role.

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NOTES

http://www.bloomberg.com/news/2011-08-22/mexico-raises-forecast-for-direct-investment-11-to-20-billion.html
Ibid.
http://www.menafn.com/qn_news_story.asp?storyid=%7B1e7d1930-cde5-4648-bef6-80666c97f606%7D
http://www.amazon.com/Enclave-Economy-Sustainable-Development-Environments/dp/0262572427az
http://thinkgeoenergy.com/archives/6953
http://negocios.promexico.gob.mx/english/05-2011/art01.html
http://www.amazon.com/dp/0262572427/ref=rdr_ext_tmb
Ibid., 4.

image: Hydroelectric power in Mexico (credit: linkogecko, Wikimedia Commons)