By: Antonio Mazzuco, Luiz Gustavo Doles and Fernanda Lazzarini
The themes of the environment, social well-being and transparency in companies have been widely explored in the corporate world in recent years. These are certainly not issues to be treated as recent concerns, having been recorded since 1960 with the creation of funds focused on this category in the USA (Trillium and Pax), since they are problems intrinsic to global society. However, they entered the radar in the late 1990s and have been gaining more and more strength in the last decade.
Popularly known as ESG practices (Environmental, Social and Governance, translated as “Environmental, Social and Governance” or ESG), companies that commit to the three pillars of ESG seek to minimize environmental impact, have social responsibility and adopt good corporate governance practices, standing out, attracting the attention of investors, obtaining greater profitability and generating better results, in order to add market value in the long term.
This expansion of interest and application of ESG practices by companies comes from pressure from society, which has increasingly demanded the adoption of sustainable practices from an environmental (energy use, waste disposal and selection of raw materials with low impact on nature), ethical and social inclusion perspectives. The outbreak of the coronavirus pandemic in 2020 and its impacts helped reinforce this trend of seeking companies that are truly committed to ESG. As a result, what was previously much more of a marketing strategy and discourse has now become a de facto part of corporate structures, positively reflecting both the company's image and its financial health.
To better illustrate the impact of the application of ESG in the corporate world, according to the GRIS 2020 report, “there was significant growth in the financial volume of global sustainable investments, reaching US$$35.3 trillion in the five main markets covered by the report (Australia, Canada, Europe, United States and Japan), which represents approximately 36% of financial assets under management in the world”.
In regulatory terms, in October 2014, the Securities and Exchange Commission (CVM) published CVM Instruction No. 552 to add socio-environmental and governance information to CVM Instruction No. 480 of 2009, which deals with the registration of issuers of securities admitted to trading on regulated securities markets.
It then became mandatory to disclose socio-environmental information such as risk factors in the reference form and practices related to socio-environmental aspects to the market.
Furthermore, in March 2022, CVM Resolution No. 80 was published. It provides for the registration and provision of periodic and occasional information by issuers of securities admitted to trading on regulated securities markets, including ESG information.
This standard requires companies that wish to be part of the financial market to adopt a series of principles that aim to generate greater care with environmental issues in publicly-held companies, such as the adoption of the following principles for companies that are part of category A (authorized to trade any securities of the issuer in regulated securities markets):
- The CEO and the board of directors must be evaluated based on performance targets, both financial and non-financial (including environmental, social and governance aspects), aligned with the company's values and ethical principles.
- the board of directors must, without prejudice to its legal and statutory powers and other practices provided for in the Code, implement and maintain effective mechanisms, processes and programs for monitoring and disclosing the financial and operational performance and the impacts of the company's activities on society and the environment
Such changes were implemented through changes to the Reference Form information requirements that aim to bring more transparency to investors in the Brazilian stock market regarding the disclosure of information on environmental, social and corporate governance (ESG) practices, alignment with standardization initiatives at the international level and greater robustness in the disclosure, by publicly-held companies, of ESG information regarding climate issues and diversity in the composition of management and staff.
Self-regulation of the fund market has also begun to address these issues, as can be seen in the update of ANBIMA rules related to investment funds that deal with environmental issues.
As of the March 2022 edition of the code, the institution began to define the concepts of sustainable investment for the investment fund industry (one with the intentional objective of protecting, contributing, not causing harm or degradation, generating a positive impact and/or ensuring rights in environmental, social and/or governance issues without the intention of compromising the financial performance of the Fund), identified which issues are part of the ESG agenda (policies, practices and/or information and/or data related to environmental, social and corporate governance issues) and defined rules so that investment funds can be considered Sustainable Investment Funds.
Therefore, funds wishing to be included in this category must disclose, in a clear and objective manner, how the criteria are incorporated into the investment policy, containing the rules, procedures and controls for the implementation and maintenance of this type of investment, presenting, at least:
- List of funds that adhere to the ESG policy;
- Total ESG assets under management;
- Employees responsible for ESG analysis and management, as well as assignment of responsibilities;
- ESG factors that are considered relevant and are the focus of investments; V. Indicators used to assess ESG issues;
- Procedures adopted for the acquisition and monitoring of ESG assets;
- Governance adopted and procedures implemented, including voting policy and criteria for the divestment of assets that do not meet the requirements set out in the ESG investment policy;
- Frequency of review of the manager's investment policy.
In light of this brief presentation, it is possible to observe that ESG practices are no longer implemented solely based on the internal will of companies, and have begun to involve the entire corporate environment, especially when it comes to publicly traded companies, as the CVM itself regulates and requires the disclosure of ESG data – including the need to explain the reason for the company's failure to implement ESG practices. It is true that, depending on the company's niche, making it fully sustainable is an almost impossible mission; however, implementing transparency, corporate governance and employee well-being are already considered ESG practices and tend to positively impact the company's results.
