Brazil: ESG regulation in Brazil - Part one: Exploring the 'E'
Environmental, social, and governance ('ESG') has become an area that organisations are increasingly expected to pay close attention towards in their business practices. In part one of this series, Bernardo Araujo, Daniella Ferrari, Eduarda Ribeiro, and Marcus Fontes, from FTR Advogados, discuss the 'E' component of ESG in the Brazilian context and how the regulatory framework on this has been expanding.
Despite having been around since 2004, the term ESG, which alludes to the assessment of how such factors are incorporated into business functions and aims to minimise negative impacts and maximise positive outcomes in all three domains, has increasingly emerged as a trending topic on social media and search engines. In Brazil, online searches for the term ESG tripled over the span of one year, showing a 150% growth rate since February 2021, according to a survey on this1.
As the largest country in the region, Brazil plays a fundamental role in the increasing importance of ESG standards for investments. Interestingly, despite the broader scope for corporate sustainability that ESG affords, public opinion in Brazil has been revealed to be widely focused on environmental issues2.
The environmental aspect of ESG addresses the interaction with natural resources and environmental consequences concerning both direct corporate operations as well as across supply chains3. In this regard, Brazil's impact is huge. Its continental dimensions and bountiful supply of natural resources not only render it one of the region's key players but also highlight its potential to set an example worldwide. In this sense, the disclosure of cases of deforestation, fires, and extinction of biodiversity have raised concerns about the biome and have generated repercussions across the globe.
Regulatory framework in the private sector
In terms of the regulatory framework for environmental protection, Brazil has established solid foundations through constitutional provisions4 as well as a myriad of legal instruments, such as Law No. 6938/81 which establishes the National Environmental Policy Law, Law No. 12.305/2010 which establishes the National Solid Waste Policy Law, Law No. 9.605/1998 which establishes the Environmental Crimes Act, and Law No. 12.651/2012 which establishes the Forestry Code.
Nevertheless, the track record on environmental impact in recent years has been compromised by episodes such as the collapse of the dams in Mariana and Brumadinho, increased levels of deforestation in the Amazon, and a rise in greenhouse gas net emissions5. In this scenario, the inclusion of environmental goals as part of the long-term strategy of private organisations and investments may be critical. The implementation of measures aiming towards the conscious use of natural resources and adequate waste management according to internal policies set by private companies is strongly encouraged, regardless of public regulation or enforcement. In this regard, a low-carbon or zero-carbon economy may require business strategies to transition towards the adoption of energy-efficient technologies, which could be initially challenging for larger infrastructure and may demand proportional investment.
According to research carried out by the Brazilian Association of Business Communication, polls indicated that ESG standards are a priority in 95% of corporate agendas in Brazil6. Pursuant to the environmental agenda, most interviewed companies reported having programs directed at reducing environmental impact, including actions such as the minimisation and recycling of waste (92%), use and conservation of water (86%), and energy conservation (84%), among others. However, while the results suggest positive transformations within the private sector, it is also important to keep in mind that they may not be representative of smaller businesses or companies located elsewhere in Brazil, since the survey involved the participation of 79 large companies located exclusively in the state of São Paulo.
Additionally, international treaties and guidelines such as the United Nation's ('UN') Sustainable Development Goals may also act as regulatory parameters for private companies dedicated to achieving transformative impact. Specifically, on the topic of familiarity with ESG standards, the Brazilian chapter of the UN Global Compact - the largest global movement of sustainable companies and stakeholders - recently published a report entitled 'The Evolution of ESG in Brazil' ('the Report'), including research findings indicating potential variations across sectoral divides7. The Report demonstrates that business sectors dedicated to finance and agribusiness were found to be more familiar with the ESG concept, while the food and beverages industry and the fashion and beauty were less familiar.
Brazil's green agenda
Ongoing institutional efforts by public entities in Brazil have also been targeting the need to advance Brazil's environmental agenda. In the judicial domain, the Federal Supreme Court is set to rule this year on the so-called 'green agenda', which brings together several environmental lawsuits questioning multiple legal provisions and government inactions in relation to the Constitution. One issue at hand is the reactivation of the 'Amazon Fund' created to finance the reduction of deforestation and the adequacy of the provisions in the National Environmental Council's Resolution for standards on air quality, Resolution CONAMA 491/2018.
On another note, initiatives such as the new sustainable agenda launched by the Brazilian Central Bank ('BC') are already setting the tone for Brazil's increasing commitment towards a 'green agenda'. According to the BC, the agenda aims to allocate resources directed at developing a more sustainable, dynamic, and modern economy8. This is achieved predominantly through risk assessment: not only are banks expected to assess the market and credit risks to which they are exposed, based on the conditions of the economy and the institutions themselves, but also the environmental effects that may impact the sector.
Another important 'green' initiative that was brought to Brazil less than ten years ago is the so-called 'B Corp' certification, which operates in Latin American through the non-profit organisation 'Sistema B'. Aiming to transform the economic system, Sistema B certifies companies that achieve the highest standards of positive impact, also defining standards, tools, and programs for businesses to change their culture and their way of operating in the market. In this sense, the certification as a B Corp requires a high degree of commitment and dedication, as businesses need to have consolidated practices, policies, and processes to be successfully qualified as part of the B Movement. In 2021, the B Corp Climate Collective, a group of companies led by the B Corp group to work together to take action regarding the climate emergency, opened a chapter in Brazil. This group of organisations is committed to demonstrating in practice how companies can act in the short-term to build a zero-carbon network by 2030. The first Global Climate Summit launched by the B Corp Climate Collective to bring together global leaders to develop climate actions received more than 6,000 participant registrations worldwide, more than 1,000 of whom are from Brazil9.
Transparency and Indicators
According to 'ESG Primer: 2022 edition - ESG Matter in LatAm', a report issued by the Bank of America in May 2022 which analyses the flow of capital for sustainable investments, the ESG trend has been gaining traction in the Latin American investment scenario. Results show that investors are considering ESG issues when making decisions, as pointed out by 73% of respondents in the LatAm Fund Manager survey10.
Nevertheless, as highlighted by the above-mentioned report, there is still ample room for improvement in the LatAm region regarding ESG standards, particularly in terms of data transparency and regulation. Among the pending regulatory reforms mentioned in the report are regulations on oil and gas production, agricultural and forestry products, carbon markets, greenwashing, solar energy system requirements for buildings, green tax incentives, preference of sustainable companies in auctions and tenders, and others.
In order to measure progress, the standardisation of the disclosure of ESG performance indicators is highly encouraged. In this sense, the new rules approved by the Securities and Exchange Commission and the BC are expected to raise the bar for disclosing ESG information in detail in the forthcoming years. However, impending climate change demands immediate action and corporate accountability. There are many opportunities in the Brazilian landscape for private companies to take the lead in adopting best practices. Those that act faster to incorporate the global trends for environmental standards will be able to enjoy greater credibility and competitive advantages, which, in turn, should reflect positively on general performance indicators.
More than a passing trend, the rise of ESG investing follows lasting values such as responsible business conduct, sustainability, and transparency. These will continue to be driving factors for positive impact, considering that creating change must be a collaborative act. Acknowledging and minimising the environmental effects on our surroundings remains a challenge for all those on the planet. As environmental factors become essential considerations for any business strategy, concerns with the other components of the ESG triad also arise. As such, the next entry in this series will address aspects of the social pillar of the ESG matters, equally fundamental to achieving sustainable business practices.
1. Only available in Portuguese at: https://valor.globo.com/empresas/esg/noticia/2022/02/21/entenda-o-que-e-esg-e-por-que-a-sigla-esta-em-alta-nas-empresas.ghtml
2. For more information in Portuguese: https://f.hubspotusercontent30.net/hubfs/7735036/Inside%20ESG%20TECH%20%232%20(4).pdf
3. For more information: https://www.dataguidance.com/opinion/international-e-esg-part-one
4. The right to an ecologically balanced environment is considered a fundamental right, leading to a worldwide trend towards the constitutionalisation of norms relating to the environment, especially after the Stockholm Conference (1972). In the Brazilian Federal Constitution of 1988 ('the Constitution'), environmental rights and obligations are highlighted in Article 225. This provision enshrines the environment as a third dimension fundamental right, more specifically a common, collective, and diffuse right, since it belongs to a community of indeterminate persons.
5. For more information: https://www.conectas.org/en/noticias/brazil-must-improve-track-record-on-environment-and-human-rights-as-a-condition-for-oecd-membership/
6. For more information: https://www.aberje.com.br/en/esg-is-a-priority-for-95-of-organizations-corporate-agendas/
7. Only available in Portuguese at: https://ideiasustentavel.com.br/pacto-global-mostra-evolucao-do-esg-no-brasil/
8. For more information in Portuguese: https://www.bcb.gov.br/estabilidadefinanceira/sustentabilidade
9. For more information in Portuguese: https://www.sistemabbrasil.org/suhdo/storage/uploads/f8b83d96c49605fd64667c197f8ad52b/wysiwyg/pdf/relato%CC%81rio_anual_final.pdf
10. For more information in Portuguese: https://valor.globo.com/financas/esg/noticia/2022/05/06/investidores-latinos-estao-mais-interessados-no-tema-esg-mas-ainda-faltam-dados-para-decisoes.ghtml