Brazil’s Securities and Exchange Commission to require detailed ESG reporting
Effective January 2023, new CVM resolution aims to encourage environmental, social and corporate governance practices
On December 22, 2021, the Brazilian Securities and Exchange Commission (CVM) published Resolution No. 59/2021, the result of a public hearing in 2020. The hearing was held with the aim of reducing compliance costs for issuers of securities, as well as establishing new reporting requirements for information on environmental, social and corporate governance (ESG) in the wake of growing calls from investors.
The resolution has also amended CVM Instruction No. 480/2009, whose provisions regulate the CVM’s reporting reference form.
In order to give companies an adequate length of time to adapt to its new measures, CVM Resolution No. 59/2021 will only take effect on January 2, 2023.
In the CVM’s reference form, sustainability is currently addressed in a rather generic way (especially in item 7.8). The new resolution requires that this issue is reported in greater detail, covering methodology, auditing, the company’s materiality matrix and key ESG performance indicators – in line with the United Nations’ Sustainable Development Goals (SDGs) and recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD).
Item 2.10 of the form highlights generating positive impact and innovation, with directors required to comment on « opportunities related to ESG issues included in the business plan ». In other words, companies must outline any ESG-related opportunities they have in specific items within the form, such as thematic bonds (green bonds and other types), sustainability-linked innovation that reduce companies’ costs and environmental impacts, as well as products and services with positive social and environmental impacts.
Climate risk assessment
In what was one of the most widely discussed issues at the public hearing, companies will have to disclose social, environmental and climate-related risks (including physical and transition risks) in the reference form (item 4.1), which in turn will require them to conduct adequate risk assessments.
In addition to the need to outline climate risks, companies must also inform the CVM whether they prepare a greenhouse gas emissions inventory, together with the scope (1, 2 or 3) of inventoried emissions. The role of the company’s management in the assessment, as well as management and oversight of climate-related risks and opportunities, must also be described in the reference form.
The new resolution has highlighted the issue of diversity, both in regard to companies’ C-level and general staff. It will be necessary to include information on staff composition and diversity objectives and goals, where applicable. This requirement is in line with a recent statement from the Brazilian Institute of Corporate Governance (IBGC), in which it recommended disclosing diversity targets and metrics with defined numbers and deadlines.
Information on diversity within companies’ managing bodies and audit committees is now a requirement (item 7.1), addressing gender, racial identity and « other aspects of diversity ». Aspects of diversity among employees and general staff are addressed by item 10.1, which must consider gender, racial identity, age and « other diversity indicators ».
The resolution also covers the issue of income inequality, with item 10.3 of the reference form requiring companies to disclose the ratio between the average and the highest individual employee income.
In regard to corporate governance, there are new provisions covering leadership and accountability for ESG issues. The reference form will require companies to inform the CVM of their reporting channels so that critical concerns on the topic are guaranteed to reach the board of directors (item 7.2c). There will also be an obligation to disclose KPIs for executive compensation, considering indicators linked to ESG if applicable (item 8.1c).
CVM Resolution No. 59/2021 is set to help companies increase transparency around their ESG practices by establishing minimum reporting and parameters. In doing so, Brazil’s domestic securities market standards should align more closely with those at the international level, which are regularly evolving.
For further information about this topic, please contact Mattos Filho’s ESG practice area.