3.1.3 Voluntary sustainability reporting

Sustainability reporting in Brazil is in an early stage and the Brazilian stock exchange, B3, former BM&FBOVESPA has been, through its long-term commitment to ESG disclosures, such as, the Corporate Sustainability Index and the Carbon Efficient Index, the primary responsible for the advancements of this agenda.1 The drivers for sustainability reporting come from the engagement initiatives of Non-Governmental Organizations and international organizations, such as the Global Reporting Initiative – Focal Point Brazil, the UN-supported Principles for Responsible Investment, supported by the growing interest of the largest south American pension fund, PREVI, CDP (former Carbon Disclosure Project), allied with the self-regulatory Brazilian Stock Exchange (B3, former BM&F BOVESPA), the Central Bank of Brazil, the Brazilian Development Bank (BNDES) and the regulator securities and exchange commission (CVM). However, results from my research’ interviews showed that the main driver of sustainability reporting in Brazil is the Corporate Sustainability Index (Índice de Sustentabilidade Empresarial – “ISE”) listing reporting requirements. These results are compatible with the results of the US Social Investment Forum (SIF) Foundation report, 2012.2

Sustainability reporting is voluntary in Brazil and not yet required by the Brazilian Securities and Exchange Commission (CVM).3 The topic has been discussed since 2009, when during the public hearing of Rule 480, of the 7th of December of 2009, the new disclosure requirements for periodical information on risk factors were discussed. It was then decided that it was not the right moment to add environmental and social reporting requirements as the Brazilian accounting standards were converging with the International Financial Reporting Standards and this change would be effective from December 2010. Besides, the addition of new environmental and social reporting requirements was seen as an overload of reporting requirements.

Rule 480 is one of the most important financial reporting regulations for publicly-held companies in Brazil. Under Rule 480, listed companies are required to file annually a form “Formulário de Referência”.45In 2011, the Brazilian securities regulator (CVM) decided to make specific adjustments and update Rule 480. On the 29th of September of 2011, CVM had a meeting with representatives of the investor relations departments of a group of listed companies to discuss the existing reporting requirements. One of the questions raised was the fact that there was no space for reporting on Environmental and Social policies. Some companies were then using one of the financial items space (point 7.8) of the reporting form of reference, which is an annex to Rule 480, to report their Environmental, Social and Governance policies. Companies questioned the securities regulator with the possibility of including a specific item to report on environmental and social policy description. There was no formal proposal from the companies, all questions were raised informally during the meeting. After these meetings, the regulator studied the possibilities of achieving what the companies informally proposed. The reporting form of reference is very comprehensive and the interest for reporting on Environmental and Social policies was not shared among all the companies present at the meeting with CVM. Some companies defended that Environmental and Social (E&S) reporting should not be part of the reporting requirements, specially not the inclusion of a sustainability report as an attachment to the annual report, as it would become lengthier and bear the risk of becoming a corporate marketing tool.

The Brazilian capital market regulator’s intention was to include a new reporting item specific for Environmental and Social information description, not allowing the attachment of the sustainability report but allowing the inclusion of a web link. Among others, companies will, in a yes or no answer, inform on whether they report on Environmental and Social, methodology used, framework and principles, external assurance, and a link with the company’s sustainability report.

On the 15th of March of 2013, the CVM proposed the new draft of Rule 480 with new amendments to corporate disclosure.6 The CVM suggested the requirement of information regarding the environmental and social aspects of the company.7 On the 9th of October of 2014, after the public comment period, and after analyzing the responses, the regulator approved Rule 552/2014, introducing a new reference form as an annex to Rule 480.8 As a result of Rule 552/2014, environmental and social risks are part of items 4.1 and 7.8. Listed companies are since the 1st of January of 2016 required to describe risk factors that may influence an investment decision, in particular, if they disclose environmental and social risks, methodology used, if these information is assured by a third party and to provide a link to that information.9 However, companies are only required to report if they disclose environmental and social risks or not. If they do not disclose this type of information there is no obligation to do so and therefore, there is no enforcement. This aspirational policy of the Brazilian regulator marks a development of sustainability reporting and may be a step towards mandatory sustainability reporting in Brazil in the future.

The Brazilian financial market regulator (CVM) considers it is difficult to require non-financial disclosure given the fact that it is not part of its traditional mandate and the demand from investors and from the market is very modest. Investors are triggered by results and very few show concerns with the underlying motivation and explanation of non-financial information. The CVM’s reporting requirements exist to facilitate corporate financial performance information and to increase transparency and comparability in the market. If a company provides false or misleading information to CVM, these companies will be in breach. The consequences for breach are e.g. payment of a fine, warning or disqualification for office.

As part of its legal duties, the regulator can legitimately act under its protective role and when necessary, propose changes to the law to protect investors and the public interest.10 The obstacle is the lack of awareness and acknowledgement of the benefits of non-financial disclosure, and the linkage with the investor’s need of protection. The CVM’s regulatory initiatives are directly dependent of the market’s needs and demands. Another challenge, maybe secondary in importance, is the large volume of financial paper work to comply with the financial disclosure requirements. The alternative could be the development of new regulation for the disclosure of non- financial information, triggered by market pressure, and proposed to the legislator. In this case, the CVM could have a monitoring and enforcement role and it would be faster to achieve a positive result. The inclusion of a requirement for Environmental and Social information description represents a step towards integrated reporting, as it adds to the existent financial reporting framework and under the financial markets supervisory role of the capital markets regulator.

In Brazil, the stock exchange does not require Environmental, Social and Governance reporting as a listing requirement. However, it is an important Environmental, Social and Governance driver, which incentivizes Environmental, Social and Governance disclosure among the listed companies. Since 2012, B3, the former BM&FBOVESPA recommends listed companies through a voluntary12 “report or explain” approach, to report on the regulator’s (CVM) reference form (item 7.8 which refers to the relevant corporate long-term relationships/ additional relevant information, not mentioned in any other item of the reference form), about the existence of a sustainability or integrated report, the access link, and in the case of no report, to explain why the company does not have one.1314The “report or explain” approach of the stock exchange aims to facilitate an easy access to these information by the investors and all other interested stakeholders. It also allows a progressive corporate participation to sustainability reporting.15 In addition to the “report or explain” recommendation, B3, former BM&FBOVESPA, offered in 2012, two workshops (in a partnership with the Global Reporting Initiative) to aid companies with their sustainability reporting journey.

In 2012, B3, former BM&FBOVESPA, reported 45,31% of listed companies responded to their recommendation of “report or explain”. In 2013, the adhering percentage grew to 66,29%. In 2014 the growth was more modest, 71,17% of listed companies reported or explained why they did not. In 2015 there were two novelties, (1) given the integrated reporting global developments, and in support of the International Integrated Reporting Council’s integrated reporting, the initiative of “report or explain for the sustainability report or similar” changed the name to “report or explain for the sustainability or integrated report”; (2) B3, former BM&FBOVESPA, also asked companies to report the reasons why they did not publish sustainability related information. The percentage of engaging companies grew very little to 71,65%. In this year B3, former BM&FBOVESPA, published the most used reporting methodologies and the report’s name as given by the companies.16

Given the CVM’s initiative of recommending environmental and social disclosure (including methodology used, third-party assurance and access link) from listed companies starting in 2016 (item 7.8), 2015 was the last year in which B3, former BM&FBOVESPA, recommended “report or explain”. Companies as of 2016 will deal directly with the regulator and the stock exchange will only gather and disclose the information as reported to the regulator.

The B3, former BM&FBOVESPA, has two responsible investment indices, the Corporate Sustainability Index (Índice de Sustentabilidade Empresarial – “ISE”) and the Carbon Efficient Index (Índice Carbono Eficiente – “ICO2”).17 For corporate governance, the B3, former BM&FBOVESPA, has created four listing voluntary corporate governance levels, with different levels of demand. From the lowest to the highest, these are: “Bovespa Mais”, Level 1 (“Nível 1”), Level 2 (“Nível 2”) and the corporate governance index (“Novo Mercado”), with specific rules corporate governance disclosure requirements in addition to the legal requirements.18 Non-compliance with the B3, former BM&FBOVESPA, listing requirements involves the application of penalties by B3, former BM&FBOVESPA.19

The ISE was launched in December 2005, at the International Finance Corporation (IFC) International Conference on Sustainable Finance in Emerging Markets, in São Paulo, and it was the world’s fourth sustainability index and the first one in Latin America.2021ISE encourages companies to adopting corporate sustainability practices and supports investors in making sustainable and responsible investment decisions (The Value of ISE, 2012). The methodology followed was developed by the Center for Sustainability Studies (CES) of the Brazilian university Fundação Getúlio Vargas (referred to as GVces). Differently from other indices, ISE does not have an exclusion list and follows a positive screening premise with no restrictions. It provides a comparative analysis of the Environmental, Social and Governance performance of listed companies.22 There is a basic condition to join ISE, a company must issue one of the 200 most liquid stocks listed on B3, former BM&F BOVESPA. From 2017 onwards, there will be an additional condition to join ISE, companies must agree to publish their answers to the ISE’s questionnaire. ISE’s portfolio comprises a limited number of 40 companies, and the portfolio is effective from January to December of each year.23

The ICO2 was jointly developed by B3, former BM&FBOVESPA, and the Brazilian Development Bank (Banco Nacional do Desenvolvimento Econômico e Social – “BNDES”) to support the low carbon economy and climate change.24 The companies part of ICO2, are also part of the IBrX-50 index, which consists of the 50 most liquid securities of B3, former BM&FBOVESPA, have joined ICO2 and are voluntarily transparent about their GHG emissions.25 There are no changes to ICO2 since it was launched in 2010.

On the voluntary front the Brazilian Steering Committee for Information Disclosure to the Market (CODIM) issued two pronouncements, no. 13 and no. 14 from 2012, recommending the disclosure of Environmental, Social and Governance information in addition to financial information in the annual report. CODIM also advises the use of reporting tools as the Global Reporting Initiative guidelines, International Integrated Reporting Council and B3, former BM&F BOVESPA, sustainability indices, in combination with external assurance.

There are two important voluntary corporate governance codes issued by two influential organizations in the area of corporate governance in Brazil: i) the Code of Good Corporate Governance and Practices for Publicly-Held Companies (the “ABRASCA Code”) issued by the Brazilian Association of Public-Held Companies (Associação Brasileira das Companhias Abertas – “ABRASCA”. The ABRASCA code, on an “apply or explain” basis, establishes principles, rules and recommendations to improve corporate governance practices by listed companies;26 ii) the Code of best Practices for Corporate Governance issued by the Brazilian Institute for Corporate Governance (Instituto Brasileiro de Governança Corporativa “IBGC”).2728sargdtjhdykyuoyuoiy29The IBGC code is voluntary for private and listed companies, and non-compliance does not involve the application of penalties. It is considered to be the most comprehensive corporate governance code in Brazil.30 In addition, CVM has also issued the CVM Guidelines on corporate governance practices by listed companies.31

On the 16th of November 2016, a working group of organizations including the IBGC, B3, former BM&FBOVESPA, and AMEC launched the first Brazilian corporate governance code. This code will applies to listed companies on a “comply or explain” basis and includes reference to ESG issues as part of the risks to be considered and reported on by Brazilian companies (item 4.5 of the code).3233The CVM is the monitoring organization.

The Brazilian Financial and Capital Markets Association (ANBIMA) has published the Regulation and Best Practices Code for Affiliated Activities (the ANBIMA Code) self-regulatory instrument that applies to the affiliated members in the registration process of public offerings in light of agreements entered by ANBIMA with public entities, including the CVM. The ANBIMA Code, requires in a public offering process the disclosure of, among others, information (i) about the issuer’s adhesion or non-adhesion, to international environmental protection standards, including specific reference to the adhesion instrument or document; (ii) the issuer’s policies on social responsibility, sponsorship and promotion of cultural events, as well as the main projects developed in these areas or in which it participates; and (iii) detailed description of the corporate governance practices recommended by the Brazilian Institute for Corporate Governance (IBGC).3435

Amongst the most relevant organizations representing the Brazilian industry and providing, among others, sustainability related information are i) the Brazilian Institute of Social and Economic Analyses (Ibase), founded in 1981 by the sociologist Mr. Herbert de Souza. This organization looked at social and environmental performance of Brazilian companies; ii) later, in 1992 Brazil hosted the United Nations (UN) Conference Rio 92, and also in the nineties important organizations were established in Brazil. E.g. Greenpeace and the Ecological Research Institute; iii) between 1997 and 1998 Ibase launched a model for social audit. Back then, there was no similar social reporting initiative in Brazil; iv) In the nineties, a group of executives and entrepreneurs developed the Ethos institute, an organization with a focus on governance and Corporate Social Responsibility. In 2000 the Ethos Institute launched the Ethos Indicators and in the same year v) B3, former BM&F BOVESPA, the Brazilian stock exchange launched “Novo Mercado” index, a corporate governance ranking index; vi) Global Reporting Initiative first focal point was established in São Paulo, Brazil in 2007 and has been since then developing networks and engaging with the different sustainability reporting stakeholders in Brazil to promote sustainability reporting among different stakeholder groups and sectors.