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

Brazil: An introduction to ESG 

Environmental, Social & Governance (ESG) in Brazil has developed significantly in recent years, specially due to ESG regulations that have introduced stricter governance rules, to the point where businesses' environmental and social concerns have become a priority. Public authorities have demanded that public held companies disclose sustainability reports and risk assessments, and some sector as financial institutions and insurance implement internal ESG and climate-related policies.

Regulatory Aspects 

The Brazilian Securities and Exchange Commission ("CVM") requires listed companies to disclose in its Reference Form (equivalent to the US 20-F) certain information involving ESG practices. The goal is to foster transparency by requiring the “practice-or-explain” system, through which a company may adopt the established practices regarding ESG or opt not to disclose certain information and provide a rationale for such decision. This disclosure involves the drafting methodology of the Reference Form; where their ESG matters are published; whether a third party has audited such company; and whether the company’s portfolio includes the UN's Sustainable Development Goals - SDG, also including 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 management roles.

In 2023, the CVM innovated by requiring listed companies to disclose financial information regarding sustainability. This document is already available for listed companies, investment funds, and securitization companies that seek to provide the market with such information. The report aims to facilitate comparison among ESG-related actions adopted by each company and will be developed according to two standards (IFRS S1 and S2) by the International Sustainability Standards Board - ISSB. From 2027, the report must be published three months after the end of each fiscal year, or simultaneously with the disclosure of the financial statements, whichever comes first.

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

The Challenge of Increased Information Disclosure 

Increasing requirements to disclose information create a new challenge: lack of uniformity and singular reporting standard.

Within this context, the Brazilian Association of Technical Standards ("ABNT") published a guideline in 2022, seeking to standardise the reporting of ESG information. The “Recommended Practice” is the world’s first ESG standard and will be one of the baselines for creating the first global standard, under development by the International Organization for Standardization (“ISO”).

Alongside the Brazilian Association of Financial and Capital Market Entities ("ANBIMA"), the CVM also published one of Brazil’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 use names such as "ESG", "ASG", "environmental", "green", "social", "sustainable", or any other terms related to sustainable finance, provided that it complies with certain requirements that correspond to this nomenclature, such as the methodologies, principles, and guidelines required to qualify the fund as such; the disclosure of an ESG results report; and the full integration of ESG factors with 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. Furthermore, ANBIMA has created a guide to ESG Bond offerings, aimed at instructing financial institutions regarding best practices for the public offering of fixed-income securities related to sustainable finance. Additionally, these guidelines aim to mitigate, even if indirectly and non-exhaustively, the risk of greenwashing, by providing international best practice references for the ESG bonds market and defining obligations regarding information disclosure.

The Sustainable Business Market Growth 

In parallel with the regulations, Brazil's sustainable business market is constantly growing. For example, the Environmental Reserve Quota, of 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. There is also the Green CPR, regulated by Decree No. 10,828/2021, a credit security related to the activities of conservation and restoration of native forests and their biomes, and an instrument for financing rural products and derivatives from the agribusiness chain, which includes the rural producer, associations, and cooperatives.

The Payment for Environmental Services is one of the many sustainable business opportunities instituted by Law No. 14,119/2021, establishing the related National Policy, through which activities can be carried out to help maintain, restore, or enhance ecosystem-generated benefits to society, as well as the financial reward for such. Environmental services can include, for instance, the conservation and restoration of native vegetation, wildlife, and the natural environment in rural areas, urban and peri-urban areas; water quantity and quality improvement; landscapes conservation; restoration, reconstitution and maintenance of the native vegetation.

Also, regarding the development of climate change regulations, Law No 14,590/2023 came into force, amending regulations for the management of public forests by concession, to expand possibilities for concessionaires to exploit the areas, authorizing the trading of carbon credits and exploitation of the concession area’s biodiversity.

Brazilian Carbon Market 

Finally, from the environmental perspective, the Brazilian Carbon Market has been subject to noteworthy developments in the last few years. The National Policy for Climate Change ("PNMC") provides for the creation of sectoral plans for emissions reduction in several economic sectors to assist in Brazil’s Nationally Determined Contribution ("NDC"), in alignment with the Paris Agreement. These sectors include electricity generation and distribution; passenger and cargo transportation; consumer goods industry; fine and base chemical industries; paper and cellulose; mining; civil construction; health services; and agriculture and cattle raising.

Regarding the Brazilian Regulated Carbon Market, Bill No 2,148/2015 establishes greenhouse gas emission limits. Companies that exceed such limits must reduce and/or offset their emissions by purchasing carbon credits, while companies that fall below the emissions ceiling receive quotas that can be sold on the market. The bill establishes a regulated market for offset bonds and the generation of credits for greenhouse gas emissions. The market must be linked to the Brazilian Greenhouse Gas Emissions Trading System ("SBCE"), to be developed in five phases over six years.

Brazilian Sustainable Taxonomy 

In 2023, the Ministry of Finance began drafting the Brazilian Sustainable Taxonomy, an initiative included in the Brazilian sustainable finance programs. The first version of the taxonomy is expected to be released by November 2024, while its mandatory adoption is scheduled for January 2026.

Corporate Governance Standards 

The Brazilian Supplementary Health Agency (“ANS”) has established new corporate governance standards that provide for its Integrated Policy of ESG.

The implementation of a compliance program is not mandatory under Brazilian legislation, unless required in specific cases, such as for entering into government contracts, as provided for by Law No. 14,133/2021 (New Public Procurement Law), and for certain entities that receive public financing.

Companies are encouraged to adequately manage third parties, including their supply chain, which encompasses the conduction of risk-based third-party due diligence. Moreover, third-party management is one of the components of an effective compliance program, pursuant to Decree No. 11,129/2022. In connection with ESG efforts, companies should also promote the identification, prevention, interruption, mitigation, and accountability of violations to human rights and environmental impacts not only within the company’s own operations, but also within their subsidiaries, third parties and supply chain.

Labour Regulations 

Labour and social conditions are a priority of government authorities, especially in the supply chain. Directives on the definition of forced labor (“modern slavery”) are stringent. For instance, addressing violations regarding the working day duration, workplace conditions, and infringements on individual dignity as reasons to acknowledge the existence of a forced labor regime.

Law No. 14,611/2023 introduced measures aimed at fostering equal pay and remuneration criteria between women and men. Although Brazil’s Consolidation of Labor Laws has yet to provide for the right to equal pay – which already applied to cases of wage disparity between men and women – such Law has innovated on penalties for violation of equal pay; measures to ensure equal pay; and transparency reports (for companies with 100 or more employees, according to the Brazilian General Data Protection Law. The process of publishing the report is regulated by Decree No. 11,795/2023 and Ordinance No. 3,714/2023 of the Ministry of Labor.

Conclusion 

In conclusion, the regulatory requirement for applying ESG parameters and duly disclosing sustainability-related information is constantly developing. The European Union’s and United States’ ESG developments are 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 numerous flourishing market opportunities.