/ ESG and Climate Risk to be part of the investment analysis of Chilean Pension Funds

2 November, 2020

The Chilean pension regulator (SP) closed on October 28, 2020 the term to file comments to a draft rule (Draft Rule) which introduces mandatory guidelines in relation to climate risk and Environmental, Social and Governance (ESG) factors.

Felipe Cousiño

The global investment community has become increasingly aware of the importance of identifying and managing climate and ESG risk.

This greater awareness has led an increasing number of large companies, including several local issuers, to adopt standards such as the Global Reporting Initiative (GRI) and commit to the Principles for Responsible Investment (UN PRI).

Indeed, the Chilean banking, insurance and securities regulator (CMF) in an end of 2019 assessment relating to a proposed rule to introduce GRI type mandatory reporting for all Chilean issuers, stated that according to the GRI database, as at July 2019, 176 different Chilean issuers (out of a global total of 13,956) had reported at some point their sustainability practices using the GRI standard. Likewise, four out of the seven Chilean pension fund managers (AFPs) as well as five other local asset management firms are signatories to the UN PRI, meaning that they have committed to incorporate ESG issues into investment analysis and decision-making processes; to be active owners and incorporate ESG issues into their ownership policies and practices; and to seek appropriate disclosure on ESG issues by the entities in which they invest.

The Draft Rule is in line with the above, though specifically adding Climate Risk as part of the market, credit and fiduciary risks that will be considered by the SP when supervising AFPs.

In this sense, the Draft Rule specifies that as part of the management of financial risks, in particular credit and market risk, the investment policy of each AFP must include the criteria that it will adopt in order to appropriately manage the opportunities and risks stemming from climate change and ESG factors, considering at least (i) identifying the reference analytical framework, should such reference framework exist; and (ii) general risk criteria used in the investment analysis and decision making process.

In this last respect, the Draft Rule requires that each AFP at least:

(a) assess the climate and ESG disclosure and risk management practices of the issuers they plan to invest in;

(b) identify metrics to measure the portfolio exposure to such risks, should such metrics exist; and

(c) describe the main actions that the AFP will commit to perform to promote good climate and ESG disclosure and risk management practices.


It would be reasonable to expect that the above move AFPs to require from issuers they invest in to adopt international reporting standards such as the GRI, and that there will be an increasing bias towards green investments that comply with a recognized taxonomy.

Nevertheless, the Draft Rule is to some extent pragmatic. Firstly, it does not force AFPs to invest only in assets that comply with a taxonomy considering that notwithstanding that the market for green assets has grown significantly in recent years, it is still relatively small. Secondly, the Draft Rule recognizes that in many cases, particularly in relation to climate change risk, it will not always be easy to identify an appropriate reference framework to manage such risks, nor to identify the metrics to measure them. Furthermore, in terms of climate risk reporting only some jurisdictions (albeit important ones such as China and the EU) have managed to move forward on a taxonomy to implement the 2017 recommendations of the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD).

In any case, the pragmatism of the Draft Rule does not mean that it does not pose significant challenges from the standpoint of corporate governance for AFPs, especially considering that these are in some cases extraordinarily complex issues which are in constant evolution.

If you need more information, please do not hesitate to contact a member of our capital markets team .