Regulations and incentives are key to fostering adoption of sustainable practices in LATAM

Julian Costábile: There is a growing recognition of the importance of these standards to improve transparency and risk management in companies, particularly parent companies located in Europe or the United States, to strongly enforce sustainability standards through their affiliates. However, adoption has been slower due to challenges such as the lack of adequate infrastructure and limited resources.  The Global Steering Group for Impact Investment recently conducted a compelling study titled “Impact Transparency - From the Ground Up”¹. The findings offer several key insights and resources on this topic. From SMS Latinoamérica we were supporting the GSG team in this valuable challenge and we think it provides insights that can help all stakeholders to improve transparency while fostering economic development.

JC: Designing a system where regulations and incentives complement each other is key to fostering the adoption of sustainable practices. Regulations can establish a framework under which incentives operate, ensuring that only companies that truly meet certain sustainability standards can access them. Additionally, incentives can further accelerate the adoption of sustainable practices beyond regulatory requirements, there is a strong need for showing a “business case” for the companies to understand that this is not just another cost, or regulatory burden, but an opportunity.

JC: Reporting on sustainability represents a significant challenge for SMEs, even in more developed economies, as they face critical operational obstacles such as a limited resource base (including technical, human, and financial assets), an inadequately developed regulatory framework for sustainability, and a substantial knowledge gap at the business level. 

This is even more difficult for SMEs in emerging countries. In more advanced economies, SMEs have a skilled workforce that allows them to compete in specialised markets within a context of growth and stability. In contrast, in less developed regions, many SMEs operate in "survival mode." Their primary concern is staying operational, even when facing severe economic difficulties and an unfavourable context. 

JC: Just like with the International Financial Reporting Standards (IFRS), the implementation of these sustainability guidelines will vary between countries. Some will adopt them directly, while others will adapt them to their local realities. The variability in economic, environmental, and social conditions makes direct adoption challenging. Therefore, it is expected that some countries will adjust these standards to reflect their realities while maintaining the essence of the global requirements.

JC:Local ecosystems in Latin America are still maturing to meet these new demands. The lack of infrastructure, the shortage of trained sustainability professionals, and low technology penetration are some of the main obstacles. While there is a growing effort by some governments, educational institutions, and the private sector to address these gaps, the pace varies significantly between countries and sectors.

JC: One of the most relevant challenges is the training and development of local capacities. Without the right human capital, the implementation of sustainability standards will be superficial. The international community should prioritise the transfer of knowledge and financial support for sustainable development projects. Additionally, creating legal and regulatory frameworks that are both effective and flexible will be crucial to facilitating the transition.

JC: This process should be led by a combination of actors: governments, private companies (especially those with experience and resources), and international organisations. Governments should provide the regulatory framework and incentives; companies should lead by example by adopting sustainable practices; and international organisations should act as facilitators, providing resources, knowledge, and a global reference framework.­­