1 . How is “ESG” in your jurisdiction defined in a corporate/commercial context, and what are its major elements?
ESG in Brazil is a combination of practices which aim to make the corporate environment more inclusive, ethical and sustainable. The foundation of modern “ESG” in Brazil is based on the UN Global Compact 2004 publication “Who Cares Wins,” and purports to align profit, purpose, sustainability, ethics and transparency. ESG has been in the spotlight in Brazil since the corruption scandals implicating several high-profile companies in different industries, along with the pandemic, the war in Ukraine and constant concerns over climate change.
ESG regulations in Brazil largely follow global standards in terms of adopting the soft law approach of ‘comply or explain’. The ESG market has consistently gained traction through the adoption of ESG metrics by pension funds in their investment decisions (which represent the core of Brazilian institutional investors with over BRL 1 trillion – circa USD 200 billion dollars – of assets under management), the formation of funds focused on impact investing and the widespread implementation of ESG policies by companies in need of funding from venture capitalists, private equity firms or through the capital markets.
Brazilian legislation also plays a key role in such a rapid and smooth adoption of ESG practices. Even prior to the rise of global ESG trends, Brazil had many ESG-related regulations across each of the three core elements:
- Environmental. The Brazilian Constitution, promulgated in 1988, established (among other topics) the need to promote social justice and protect the environment as a fundamental principle. The same applies to the National Environment Policy Law No. 6,938/1981, which promotes and enforces sustainable economic development.
- Social. The Consolidated Labor Laws (Decree-Law No. 5,452/1943), among other matters, forbids discrimination in the workplace.
- Governance. The Brazilian Corporations Law (Law No. 6,404/1976) was significantly ahead of its time and represented a fundamental step towards future ESG policies. It has brought in at several critical concepts.
One is a definition of stakeholders — controlling shareholders and managers must ensure that a company observes not only the interests of controllers, but also of minority shareholders, employees, customers, suppliers and the community in which the company is based. Second, is that such law also demands that both controllers and managers ensure the company follows its social function in the developing of its activities.
Moreover, since the early 2000s, the Brazilian stock exchange (B3) has developed a sophisticated set of voluntary regulations applicable to listed companies who decide to list their shares in different corporate governance segments. This includes the Novo Mercado regulations, which require companies to adopt more robust governance and reporting practices.
Finally, since 2013, several corruption scandals have emerged in Brazil, particularly the Car Wash operation. This operation started off as an investigation into money laundering before expanding to uncover a vast and intricate web of political and corporate racketeering. Car Wash has led to the adoption of several local laws and regulations enforcing international standards of anti-bribery and corruption and anti-money laundering, namely the Clean Company Act No. 12,846/2013.
2 . What, if any, are the major laws/regulations in your jurisdiction specifically related to ESG?
The following are the major laws/regulations specifically related to ESG:
- Resolution 59/2021 (effective as of the beginning of 2023), issued by the Securities and Exchange Commission of Brazil (CVM), operates similarly to Directive 2014/95/EU, and requires listed companies to provide information on ESG practices and indicators in a reference form (equivalent to the US 20-F) under a “comply or explain” basis. This form is required on an (at least) annual basis, and is subject to investigation and administrative penalties in case of misrepresentation. This resolution lists many ESG-related topics requiring the company to explain their practices, including: (i) where they publish their ESG matters; (ii) if such publications are audited by any independent advisor; (iii) the adoption of any (and which) ESG key performance indicators; (iv) greenhouse gas emissions; (v) business opportunities related to ESG; (vi) ESG risk factors potentially affecting decisions by the company investors; (vii) the role of managing bodies in ESG matters; (viii) the existence of internal channels permitting the flow of ESG information/complaints; and (ix) ESG elements affecting management compensation.
- Resolution 139 and Normative Instruction 153, issued by Brazil’s Central Bank, requires the (at least) annual disclosure of a Social, Environmental and Climate Risks and Opportunities Report.
- Resolution 4.327 provides the guidelines that must be observed in the establishment and implementation of the Social and Environmental Responsibility Policy by financial institutions.
- Resolution 4.945, issued by the National Monetary Council, which amended the Social and Environmental Responsibility Policy to the Social, Environmental and Climate Responsibility Policy.
- The Brazilian Stock Exchange (B3) listing segment self-regulations (Bovespa Mais, Nível 1, Nível 2 and Novo Mercado) have, since the early 2000s (and through constant updates), been incrementally increased governance standards. These include, among other matters (and variances depending on the segment adopted), quarterly and more detailed financial reporting, audit committees, the presence of independent directors, one share one vote, enhanced rights to minority shareholders such as full tag along rights and so on.
- Decree 11,075/2022, created the Regulated Brazilian Carbon Market, Law 12,305/2010, implemented the National Policy on Solid Waste.
- Law 14,119/2021 regulates the National Policy for Environmental Services Payment, a financial incentive to promote environmentally-friendly services.
3 . What other laws/regulations in your jurisdiction touch on ESG themes?
The Brazilian legal system has a strong tradition in environmental and labor regulations. Under Law 9,605/1998, companies and individuals may be criminally liable for damages caused to the environment. Other environmental laws establish policies and standards for activities developed in environmentally sensitive areas, hazardous waste disposal, water waste and effluent standards, use of chemicals, environmental licensing and multiple other areas.
Brazilian environmental law is moving towards incentive policies rather than prohibitive directives, rewarding companies that follow certain principles – for example, Decree 10,828/2021 introduced the “Green Credit Certificate,” a credit instrument awarded to finance reforestation activities and the maintenance of native vegetation on rural properties.
Social aspects of ESG are often covered by labor regulations, which are strictly enforced. Brazil is a party to most international treaties on human rights and treaties under the Organization of American States and the International Labor Organization. The substantive human rights are mainly provided for in these treaties and in Brazilian Federal Constitution.
Additionally, Federal Decree No. 9,571/2018 internalizes the UN Guiding Principles on Business and Human Rights, establishing further guidelines on human rights that may be voluntarily implemented by companies in Brazil.
The CVM and the Brazilian Corporations Law establish multiple governance minimum principles that must be followed by public companies, regarding minority shareholders protection and the role of shareholders and management. The Brazilian stock exchange (B3) also requires some minimum governance standards for companies listed therein.
4 . What, if any, litigation or enforcement activity has your jurisdiction seen related to ESG?
Brazil has broad environmental-related restrictions and, as such, the country has seen notable cases of climate-related litigation. In 2022, the Superior Court of Brazil (STJ) has been ruling over a so-called “Green Package,” a number of seven proceedings related to the protection of the Amazon Forest, and addressing climate emergencies. So far, the court has decided in favor of the environment.
Brazil has seen enforcement of anti-greenwashing legislation through the lens of consumer protection. In 2013, the National Council for Advertising Self-Regulation ruled against companies that carried misleading advertising practices about the sustainability of its products (Group of Consumers v. Usina São Francisco, Representation 087/13 and Conar v. Organique Brasil, Representation 046/13).
Brazil has a long tradition on the enforcement of labor laws, such as the Ministry of Labor and Social Security’s “Dirty List” of Slave Labor, which periodically publicizes companies that have been found to employ slave labor. Additionally, spontaneous investigations may be conducted by the Public Ministry of Labor to investigate any unlawful procedures in companies, often resulting in labor public actions and penalties.
Finally, non-compliances with mandatory governance and disclosure standards by public companies and financial institutions are overseen by the CVM and Central Bank, which can impose administrative penalties, varying from warnings and fines to suspension or disqualification.
5 . What are the major non-law/regulatory drivers of ESG trends and developments in your jurisdiction?
Soft non-binding laws
Brazil promotes ESG through multiple soft law instruments. The annual CVM directive release reinforces governance practices to be followed by companies. Since 2017, Brazilian Institute of Corporate Governance (IBGC) has published the Brazilian Corporate Governance Code which has been adopted by the CVM, also under the “complain or explain” approach. B3 is also proposing that public companies abide by minimum diversity standards. Finally, many companies utilize the UN Sustainable Development Goals as the basis for internal policies and initiatives.
Stakeholders have been key in developing ESG in Brazil. As the appetite for sustainable investment has grown nationally and abroad, multiple associations, institutional investors and the retail market has demanded further development of ESG standards in the country, often copying international development.
6 . Are the laws, regulations and obligations highlighted in Question 2 primarily related to corporate disclosure?
Virtually all specific ESG regulations highlighted in response to Question 2 are primarily related to corporate disclosure. Other, older, non-specific ESG laws and regulations are not related to corporate disclosure but rather compliance with standards contained therein, and are subject to investigation and penalties.
Considering that all such ESG-specific regulations are relatively new, most companies have not yet been able to produce comparative reports or internal ESG data, and many of the reports disclosed are limited to describing generic ESG matters without reference to a recognized taxonomy framework.
7 . Which sectors are most impacted by ESG in your jurisdiction? How significant is ESG investment in your jurisdiction?
ESG implementation has been a trend in all areas of the Brazilian economy, but some sectors have been impacted more than others.
The agricultural sector in Brazil has developed with a focus on efficiency, but has always been highly regulated and supervised by governmental authorities aiming to curb environmental damage. The Regulated Brazilian Carbon Market, the National Policy for Environmental Services Payment and the Green Credit Certificate set out incentive policies that heavily influence the producers to adopt ESG development.
Brazil has always been an international example of clean energy generation. In 2021, the Ministry of Mines and Energy created the “Fuel of the Future” committee (Resolution CNPE No.07/2021), aiming to develop biomass, biodiesel and other sustainable fuel alternatives.
The Brazilian Central Bank has been at the frontline of the establishment of an ESG financial framework in Brazil. Banks have to comply with multiple directives relating to ESG financial disclosure and management, as well as accounting for climate, social and environmental risks in their business.
Private equity and venture capital
Private Equity and (mostly) Venture Capitalists have rapidly understood the importance of offering specific ESG-related products to their investors, and have been playing a key role in both forming specific impact investing funds and incentivizing companies to adopt a strong ESG practices (sometimes more comprehensively than specified under existing laws and regulations) in order to receive funding.
The National Superintendence for Pension Funds (Previc) oversees Brazilian closed pension funds, which has a significant role in the development of the equity capital markets in Brazil. A recent study, published in September 2021 (and reported in the reputable newspaper Folha de São Paulo), found that 56% of Brazilian pension funds adopt ESG metrics in their investment decisions. Of those, 40% integrate ESG factors systematically, and 81% use those factors to help them manage the investment risks.
This report also incentivized the adoption of more standardized reporting mechanisms by companies to facilitate the pension funds’ task of finding and monitoring ESG investment opportunities. The publication of the report was prior to the passing of CVM’s Resolution 59, which also purports to resolve the current lack of disclosure of ESG metrics.
8 . What are the trends in your jurisdiction regarding ESG governance?
ESG matters can be addressed by Boards of Directors, particularly in companies that have not been able to build a more detailed and specialized corporate structure. Boards may take into consideration information and advice provided by technical advisory committees, such as sustainability or diversity committees, where existent. Increasingly, variable compensation (including bonuses) has been linked to executives meeting ESG goals. The adoption of governance and corporate policies enforcing ESG standards are growing, as well as more robust due diligence checks and processes for mapping internal and external ESG risks and impacts.
Another initiative is the creation of specific committees to work on social-related issues, such as gender-based disparities. Some companies establish governance metrics and goals, committing to, for example, a certain percentage of female participation in high management and on the Board. As such, as new ESG metrics become more standardized, it is expected that specific ESG committees, either at Board or executive level, will become the de facto norm in Brazil.
9 . To what extent are ESG ratings or ESG benchmarks relied upon in your jurisdiction?
ESG rating agencies
The Brazilian market follows ESG rating agencies used worldwide, such as S&P, Moody’s and Fitch. As such, rating agencies often follow parameters established by foreign countries; they may cause distortions and fail to appreciate internal or specific concerns, but those concerns can be explained by companies in their disclosures.
ESG benchmarks have been growing in Brazil, with multiple ratings issued in the last couple of years. These include ISE-B3, MSCI’s ESG Rating and S&P/B3 Brasil ESG. Considering the lack of ESG standardization and the multiple indicatives adopted (and often adapted from foreign systems, as above), it is expected that the ESG ratings and benchmarks will increase in effectiveness once ESG implementation reaches the next step of development in Brazil, particularly from 2023 when CVM’s new Resolution 59 will become effective.
10 . What is the role of the private markets versus public markets in driving ESG developments in your jurisdiction?
The ESG agenda is pushed mainly by private investors, by stakeholders and by international bodies. However, regulators have been increasingly focusing on ESG standards, as outlined in the responses to Questions 2 and 3.
Reducing negative environmental impact is a common initiative by companies: focusing on the minimization and recycling of waste, water conservation and energy conservation programs. Increasingly, companies set goals to become carbon-neutral or carbon-efficient. Acquiring carbon credits and issuing ESG bonds and green bonds is also a practice on the rise, following government incentives to do so (see the response to Question 3).
From 2023, when the CVM’s Resolution 59 takes effect, we will start to see more accurately the public market’s role in ESG matters. In Brazil, public companies generally have more sophisticated internal policies and resources to implement changes, such as those required by ESG standards. As such, it will be interesting to see how the public markets react to companies more focused on “explaining” their lack of ESG practices and to those actually able to evidence their “compliance” to ESG standards. Hopefully, the latter will experience better results when subject to similar industry and market conditions.
11 . What are the major challenges in terms of compliance for companies under ESG obligations?
The next chapter for ESG in Brazil is developing an ESG taxonomy standard to enable better comparability of the ESG disclosures issued by companies (see the response to Question 13). We expect CVM’s Resolution 59 will solve part of that problem with respect to listed companies. However, the private market still lacks standardized data collection and access. Standardization will allow for a more comprehensive decision-making process regarding investing, incentivizing, monitoring and supervising ESG integration.
12 . What information sources are most relevant for ESG considerations in your jurisdiction?
The World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) are NGOs with a solid presence in Brazil. The Brazilian Institute for Corporate Governance (IBGC) is a non-profit that plays an important role in issuing governance certifications and informing best practices. The Forest Stewardship Council (FSC), created as an initiative for environmental conservation and the sustainable development of forests, and is also a well-recognized source for certifications.
There are also some leading think tanks producing knowledge and providing consultancy on ESG themes, particularly, the Center for Sustainability Studies at Getulio Vargas Foundation (FGVces), the Brazilian Association of Public Companies (Abrasca) and ANBIMA. Public universities, such as the University of São Paulo and the University of Brasília, tend to be valuable information sources, as they contribute most of the academic research produced in Brazil.
13 . Has your jurisdiction developed a Taxonomy related to ESG?
Brazil has yet to officially adopt an ESG taxonomy. However, many initiatives are currently being undertaken by the private and public sectors in order to develop a national taxonomy standard. In 2020, the Accounting Pronouncements Committee (CPC) issued Technical Orientation No. 9 (OCPC 9), which nationalizes the International Integrated Reporting Council (IIRC) standards for the issuance of Integrated Reporting in Brazil.
In July 2022, the Brazilian Sustainability Pronouncements Committee (CBPS) was created, reflecting the structure of the CPC that is used to adapt the International Financial Reporting Standards (IFRS) on to the Brazilian market. The CBPS is composed by members of Abrasca, Apimec, B3, CFC, Ibracon and FIPECAFI, and is expected to nationalize and standardize the normative issued by the International Sustainability Standards Board.
Despite that Brazilian stakeholders have not reached a consensus regarding acceptable sustainability and related metrics, it is expected that the initiatives developed within the EU will affect the future of taxonomy-related discussions in Brazil. Global companies with activities in the country will likely push for uniformity in the taxonomy considerations to reduce transaction costs of investment in Brazil, and regulators may understand that the developing of an independent taxonomy structure can clash with initiatives developed abroad.
14 . What does the future hold for ESG in your jurisdiction?
In the short-term future, it is expected that Brazil will see an increase in ESG-related regulations and laws, as well as the improvement and refining of existing legislation. Regarding environmental practices, it is expected that the market of bonds, assets and services (both regulated and voluntary) will develop, and environmental protection will be pushed forward by financial incentives. It is expected that more institutional investors will start considering ESG indexes and certifications when building their investment portfolios, as data becomes easier to access.
In the medium-term future, in addition to the continuation of the above-mentioned expectations, it is likely that international frameworks will integrate into Brazilian legislation. In the long-term future, it is expected that prioritization of investment in companies with the best ESG practices will be consolidated. The issuing of green bonds and ESG bonds will likely increase. It is also likely that litigation and enforcement activity related to ESG will become more common, and that public companies will expand their role in driving ESG developments.
In summary, we expect ESG investment in Brazil to continue growing jointly with worldwide trends. Brazilian society is increasingly demanding accountability from companies in regard to ESG, which will in turn lead to stricter sustainability practices.