ESG trends in the CVM’s Reference Form: How are companies tracking?

Taking effect in January 2023, Brazilian Securities and Exchange Commission (CVM) Resolution No. 59 established a series of new obligations – especially in regard to environmental, social and governance (ESG) issues – that publicly-held companies must disclose via the CVM’s Reference Form. The new ‘comply or explain” model has been implemented to meet investors’ growing demands for transparency on these issues.

With the passing of the first annual deadline for publicly-held companies to update the CVM’s new Reference Form, the disclosures have allowed for a quantitative evaluation of the ESG landscape. As such, Mattos Filho’s Capital Markets and ESG practices have prepared a new publication (click here to view) highlighting recent trends based on the information disclosed.

The Reference Forms of Brazilian companies meeting the following criteria were considered in the survey:

• Companies listed on B3’s Novo Mercado, a segment with differentiated standard in corporate governance;
• Companies included in the Ibovespa portfolio, the main performance indicator of the stocks traded in B3, from May to August 2023; and
• Companies whose last fiscal year ended on December 31, 2022.

As such, 55 companies were analyzed – 67% of which were also part of the B3 Corporate Sustainability Index (ISE) in the same four-month period.

Environmental and climate-related aspects

Currently, 89% of the analyzed companies disclose ESG information through annual reports or sustainability reports, with 80% of them subject to external audits or reviews.

The numbers regarding climate issues are also positive, with 87% reporting they carry out GHG emission inventories. The CVM also requires these inventories to include information on the scopes of the emissions, and based on the companies’ disclosures, all inventories considered Scope 1 and Scope 2 emissions. Moreover, 90% of the inventories included Scope 3 emissions – representing a significant level of compliance, given the complexity of data collection and control for supply chain-related emissions.

76% of the analyzed companies reported installing a specific management-level position in charge of assessing, managing, and overseeing climate-related risks and opportunities.

In addition to these aspects, 58% reported considering ESG opportunities in their business plans, demonstrating their understanding of the market’s growing demand for sustainability-focused products and services.

Risk factors

CVM Resolution No. 59 introduced changes to how companies must disclose risks with the potential to influence investment decisions, requiring them to disclose social, environmental, and climate-related risks (including physical and transitional risks) separately. In this new format, companies must state the risk factors they are exposed to in order of relevance, always in line with the risk matrix and their sustainability reports.

Based on the Reference Forms, it is evident that 78% of the analyzed companies believed they were exposed to climate-related risks, 98% of which consider themselves exposed to physical risks, notably those related to natural disasters and severe weather conditions. However, only 60% of these companies suggested they were exposed to transitional risks, indicating that there is potential for greater market awareness on this topic.

Furthermore, 82% of the companies believed they were exposed to risks concerning social issues. The most common risks reported in this regard are related to workplace accidents and, above all, the inability to adopt adequate social measures for the needs of their stakeholders and the communities where they operate.

Lastly, it was found that 84% of the companies considered themselves exposed to environmental risks. However, the primary matter they reported was complying with environmental legislation, whether directly or in their supply chains.

Diversity and Inclusion

The Reference Form’s new format also seeks to establish greater transparency regarding diversity at the management and employee levels. In this regard, companies are now required to disclose (at a minimum) information grouped according to gender, race/ethnicity and age, based on managers’ and employees’ declarations.

Companies can also group managers and employees based on other diversity criteria, such as sexual orientation and people with disabilities. However, few of the analyzed companies made these optional disclosures in this first round of updates, with most disclosing only mandatory information.

Only 16% of the companies grouped employees according to non-mandatory diversity criteria. In this case, the most frequently adopted criteria related to the inclusion of people with disabilities and employees’ birthplaces.

Meanwhile, only 24% considered non-mandatory diversity criteria in regard to company management (board of directors and statutory board), with age being the primary criterion. Nevertheless, 34% reported they had adopted specific diversity goals for the management, primarily related to increasing gender and racial diversity at senior levels.

Over the next two years, the companies in question will have to comply with new diversity and inclusion obligations that B3 has set in regard to board members and C-level officers. Released on July 20, 2023, the new B3 Issuers Regulation states companies must adopt diversity criteria when electing members of their statutory management, appointing at least one woman (i.e., anyone who identifies with the female gender) and/or a member of an underrepresented community (defined as ‘black’, ‘mixed race’ (parda) or ‘indigenous’, a member of the LGBTQIA+ community, or a person with disabilities) to positions on the board of directors or the statutory board. Once these obligations take effect, they will also follow the ‘comply or explain’ model.

While 94% of the analyzed companies already have at least one woman serving as board member or as statutory C-level, only 36% feature a member of an underrepresented community. Those boards that featured the latter all fulfilled the racial criterion (already a mandatory disclosure in the Reference Form), yet none reported the presence of an LGBTQIA+ community member or a person with disabilities.

Remuneration and wage disparity

Another aspect CVM Resolution No. 59 addresses concerns wage disparity, a topic considered in diversity mapping processes. In their disclosures, companies must compare:

• The highest individual salary at the company (as per the results of the previous fiscal year); and
• The median individual employee salary (measured excluding the highest individual employee salary), as per the results of the previous fiscal year.

The average ratio for these two elements among the analyzed companies was 342:1, but there were notable differences among sectors, as indicated below:

¹ Sector classification adopted by B3.

Despite the significant levels of wage disparity indicated in the reference forms, companies are increasingly concerned with aligning their remuneration policies with new demands from the market. 40% of the companies already consider ESG performance indicators (mainly related to diversity and inclusion) and climate-related goals when calculating variable compensation for company management.

Transparency

In 2023, it became mandatory for companies to disclose confirmed cases of embezzlement, fraud, irregularities, and illicit acts against the public administration. This measure sought to ensure greater transparency on the subject. Only 3.6% of the companies reported such events for 2020, 2021, and 2022, a positive result of the ongoing efforts to develop and adopt more robust corporate governance and internal control practices.

Considering the importance of ESG matters and the reporting channels required by B3’s Novo Mercado, 73% of the analyzed companies also reported having channels to ensure senior management is aware of critical ESG and compliance-related issues.

Next steps

Part of the CVM’s 2023-2024 Plan involves adopting ESG supervision measures along thematic lines, in order to facilitate the analysis of companies’ compliance with the new ESG obligations vis-à-vis their reference forms and assess associated risks. Depending on the development of the ESG over the two-year period, the CVM expects to adjust the applicable obligations to ensure that the Brazilian market is aligned with foreign markets and investors’ growing demands.

In October 2023, the CVM established a series of goals for 2023 and 2024 to promote sustainable initiatives in line with its Sustainable Finance Policy. One key goal concerns the creation of market guidelines regarding good ESG practices, which will be determined by supervising the systems and procedures that publicly-held companies have already implemented, as well as financial education initiatives the CVM conducts to raise investor awareness of ESG factors.

Moreover, with the changes the B3 Issuer Regulation has brought about in 2023, the Brazilian market has assumed a prominent position in regard to global ESG development, especially concerning diversity and inclusion-related topics.

Given such developments, the companies and their ESG practices are expected to be subject to increasing scrutiny by investors and regulators.

While there may still be room for improving disclosures and the ESG practices already adopted, the analyzed companies’ reference forms reflect the Brazilian market’s genuine concern regarding ESG compliance.

Click here to view Mattos Filho’s infographic summarizing the ESG-related changes to the CVM’s Reference Form.

For further information on this topic, please contact Mattos Filho’s Capital Markets and ESG practice areas.