BRAZIL: An Introduction to Environmental, Social & Governance (ESG)

The Evolution of ESG in Brazil 

ESG has seen significant regulatory developments in Brazil in recent years. Initially focusing on the soft law approach of ‘comply or explain’, ESG regulations have recently started introducing more strict governance rules, to the point where businesses' environmental and social concerns are top of mind.

Public authorities have demanded the disclosure of sustainability reports and risk assessments, internal application of ESG and climate-related policies by companies, while many sustainable business opportunities outline a promising landscape for financial development.

The Brazilian Securities and Exchange Commission

The Brazilian Securities and Exchange Commission ("CVM") published CVM Resolution No. 59 in December 2021, entering into force in January 2023. The CVM altered the model of the Reference Form (equivalent to the US 20-F), requiring listed companies to disclose information regarding ESG, including: the methodology used for the drafting of the Reference Form; where their ESG matters are published; whether a third party has audited such company, and whether the company includes the UN's Sustainable Development Goals ("SDG") into its portfolio. Other key points include: the indication of a materiality matrix and key indicators of ESG development, the keeping of a greenhouse gas emissions inventory, and the factors considered in the remuneration of managers and directors. The CVM has implemented the "practice or explain" methodology into the Reference Form, by which a company may adopt the established practices regarding ESG, or opt not to disclose certain information, in which case the company must explain why it decided to do so.

In parallel, financial institutions, in accordance with rules from Brazil’s Central Bank and the National Monetary Council, as well as insurers, through the Superintendency of Private Insurance, follow similar dynamics — required throughout the year to publish a Social, Environmental, and Climate Risks and Opportunities Report, to implement and incorporate an ESG internal policy to safely predict and prevent environmental, social, and climate risks.

The Challenge of Increased Information Disclosure

The increasing need for information disclosure faces a challenge: lack of uniformity, and the lack of a singular reporting standard that can be universally applied. With this in mind, the Brazilian Association of Technical Rules ("ABNT") published ABNT PR 2030, a recommended practice that encompasses international best practices for ESG disclosure in a way that is applicable to any company, regardless of size or sector.

Alongside the Brazilian Association of Financial and Capital Market Entities ("ANBIMA"), the CVM also published one of the country's first greenwashing and social washing regulations. CVM Resolution No. 175/2022 established that a fund's regulations and the descriptive annex of its share class can only have a name that refers to environmental, social, and governance factors, such as "ESG", "ASG", "environmental", "green", "social", "sustainable" or any other terms related to sustainable finance, provided that it complies with a series of requirements that correspond to the nomenclature, such as the methodologies, principles, and guidelines followed to qualify the fund as such, the disclosure of an ESG results report, and the full integration of ESG factors alongside the goal of generating socioenvironmental benefits. Similarly, ANBIMA established rules for fund nomination, stating that a fund may only use an ESG-related term or receive the "Sustainable Investment" suffix if it is fully dedicated to the ESG cause, under restriction of including such criteria, but not identifying it as its primary goal.

The Growth of the Sustainable Business Market 

In parallel with the regulations, Brazil's sustainable business market is constantly growing. For example, the Environmental Reserve Quota, of Federal Law No. 12,651/2012, a nominative title representing a land area whose native vegetation exceeds the legal requirement, and that is in existence or a state of recovery, is gaining more relevance in the market. In addition, there is the Green CPR, regulated by Federal Decree No. 10,828/2021, a credit security related to the activities of conservation and recuperation of native forests and their biomes, and an instrument for financing rural products and derivatives, from the agribusiness chain, that includes the rural producer, associations, and cooperatives, among others.

The Payment for Environmental Services ("PSA") is one of the many sustainable business opportunities. Instituted by Federal Law No. 14,119/2021, established the PSA National Policy, through which activities can be carried out that help maintain, restore, or enhance the society-relevant benefits generated by ecosystems, as well as the financial reward for such. Environmental Services can include, but are not limited to, the conservation and recovery of native vegetation, wildlife, and the natural environment in rural areas, urban and peri-urban areas; conservation and improvement of the quantity and quality of water; conservation of landscapes of great scenic beauty; recovery, and reconstitution of the native vegetation cover in degraded areas; sustainable management; and maintenance of the areas covered by native vegetation that are vulnerable to authorization for alternative land use.

The Brazilian Carbon Market 

Finally, from the environmental perspective, it is also important to highlight developments that the Brazilian Carbon Market has been subject to in the last few years, with legislation published defining the financial characteristics of carbon credits and, possibly within the next months, the approval of the Brazilian Market of Emissions Reduction ("MBRE"), provided for in the National Policy for Climate Change ("PNMC") (Law No. 12,187/2009, and its regulation, Decree No. 9,578/2018), but currently under discussion in the House of Representatives. The PNMC also provides for the creation of sectoral plans for emissions reduction in many different economic sectors to aid the country in reaching its Nationally Determined Contribution ("NDC"), in alignment with the Paris Agreement, to reduce its total emissions by 37% by 2025 and 50% by 2030, both in comparison to 2005 emission levels. These sectors include: electric power generation and distribution; urban public transportation and interstate passenger and cargo transportation systems; transformation and durable consumer goods industry; fine and base chemical industries; paper and cellulose industry; mining; civil construction industry; health services; and agriculture and cattle raising.

Corporate Governance Standards 

More recently, the National Supplementary Health Agency (“ANS”) established new corporate governance standards that provide for its Integrated Policy of Governance and Socio-environmental Responsibility— ESG.

Labour Regulations 

Labour regulations encompass the Social aspects of ESG, strictly enforced in Brazil, given that the country is a party to international treaties on human rights, in addition to the provisions guided by the Federal Constitution of Brazil. Currently, labor conditions are the main concern of government authorities, especially in the supply chain.

Conclusion 

In conclusion, the regulatory requirement for applying ESG parameters and duly disclosing sustainability-related information is constantly developing, to the point that companies that have not already been subject to such rules have started to apply them voluntarily, not only to brace themselves for possible future regulation but to gain trust in the public eye regarding their compliance with increasingly requisite matters. The European Union’s and United States’ ESG developments serve as an example for Brazilian legislation, which seeks not only to meet market demands but to rise as a prominent player in the sustainability agenda of international commitments. While this creates further rules that companies must abide by, it also provides for a series of flourishing market opportunities.