September 2021 – Brazil – Rossetti Advogados

Over the last years, the ESG (Environmental, Social and Governance) agenda has gained more and more strength in the corporate world, once the business models go beyond prioritizing the profit and financial gains of their stakeholders. 

The acronym ESG was used for the first time in 2004, at an event organized by the United Nations (UN) in partnership with companies of the financial industry, named “Who Cares Wins”. 

The idea was to provoke the discussion and obtain answers on how to integrate into the profitable purpose of each business model the responsibility for complex issues of a more and more interconnected society, involving social, environmental and corporate matters.

The acronym ESG commenced to be used as a metrics to guide good business practices, such as the environmental and social impacts of the production chain or of the business, the carbon emissions, the management of waste and residues from a specific activity, issues involving labor and the inclusion of workers and the accounting methodology, among others. 

The adoption of ESG practices has deeply changed the paradigm of the relationships between companies and their investors, once they have noticed that practices that were previously associated only to sustainability commenced to compose a strategy for the survival of their business, since the longevity of the human species, i.e., of its consumer market, commenced to be strongly threatened by the social and environmental crises of the modern world.

In the business context, the companies commenced to be required by their shareholders and investment funds to engage in practices that guarantee their survival in the long run.

In addition, small investors that commenced to have access to Stock Exchanges now analyze, to make their investment allocation decisions, not only the economic results of the companies, but also if they are committed to the same sustainability values they defend.

In Brazil, the implementation of ESG investments is only beginning, as indicated by the data of the Brazilian Association of the Financial and Stock Market Entities (ANBIMA). 

In the year 2020, the association conducted a broad research among the companies that operate in the Brazilian financial market, and it noted that only 11% of them count on a specific department to evaluate ESG investments and only 5% have a committee exclusively devoted to this issue, even if most of them acknowledge the importance of these criteria, which guarantee more transparence and confidence among investors, in addition to more sustainability and potential profits.

Irrespective of the gap between foreign and Brazilian companies, since 2005 B3 – Brasil, Bolsa, Balcão, which is responsible for the most important Brazilian stock exchange, has a Corporate Sustainability Index (ISE), being the pioneer, in Latin America, in the creation of a reference index to guide socially responsible investments. The ISE is the outcome of a partnership among B3 (former BOVESPA – São Paulo Stock Exchange) and various other private entities, as well as the Ministry of Environment.

On January 1^st, 2021, the ISE portfolio had 36 shares of 30 companies, with a market value of R$1.64 trillion, representing 15 industries. Only companies holding the 200 shares with the greatest liquidity on the Stock Exchange are invited.

For this year 2021, B3 has already announced that it is working on the reformulation of its methodology for analyzing listed companies, in order to be even more judicious in the analysis of the companies’ ESG practices, in order to increase the attractiveness for investors and companies, strengthen the portfolio of products and open up new fronts for B3’s ESG business.

However, the ESG subject should not be limited to the private initiative only. The public sector, due to its very nature, works with ESG issues everyday, by means of its actions. 

What is expected from the governments is that they pave the way, by creating conditions and regulations required to encourage investments and the adoption of good practices by the companies. And this is not all: governments will soon be required to incorporate ESG principles into the way they run the State. 

Since 2015, when the UN established the 2030 Agenda, with a group of nine Sustainable Development Objectives (ODS), which are subdivided into more than a hundred goals for a country to be considered sustainable, fair and prosperous. This agenda is guiding governments around the world to change the course of their public policies, and they are now being required by their population, ultimately their voters, to adopt practices committed to a more sustainable world.

Brazil needs not only to join these discussions, but also to engage the private sector, so that we are clear about the costs involved and what tools we should adopt to shape the economy of the future. Our mission today is to integrate the private sector, leaders and experts into the ESG agenda, for us to be part of this global negotiation.

For more information on the above or in other matters, please contact Maristela SA Rossetti (mar@rraa.com.br) or Gilberto Rossetti (gmr@rraa.com.br).

This article is based on publicly available information and given for informational purposes only. It is not intended as legal advice or as a comprehensive analysis of the matters referred to herein.

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