ESG factors as investment opportunities in Brazil

Increasing consideration for environmental, governance and social (ESG) factors in investment decisions has become a global trend among investors, market agents and managers. Brazil has also seen a growing movement towards self-regulation in publicly listed companies in order to align their corporate governance and information disclosure, in particular, with international standards that ensure increased transparency and accuracy for investors.

The Brazilian stock exchange, B3, developed a Corporate Sustainability Index (ISE) to measure the average stock performance of companies that undertake to adopt sustainable policies. The ISE currently comprises stocks from thirty companies that account for a market capitalization of BRL1.64 trillion. Interestingly, from its establishment in 2005 to 2019, the accumulated performance of the index is better than the Ibovespa performance. The Corporate Governance Stock Index (ICG), that measures the stock performance of companies that adopt a higher-level of corporate governance standards, also indicates that the index has outperformed the benchmark.

The public sector also demonstrates an interest in addressing sustainability matters. Several authorities issued rules requiring state owned companies and entities in the federal administration to prepare sustainability reports or integrated reports. The integrated report, used in many jurisdictions, summarizes the activities and inputs adopted in the production of goods and services with a consistent, trackable, comprehensive, auditable and useful taxonomy related to ESG. The rationale of the integrated report is to present investors with data that allows them to verify the effects of ESG practices on the company’ revenue and costs, the reduction of negative externalities, and the enhancement of positive externalities over the years. This leads to socially responsible investments which tends to be greatly valued by investors and consumers.

Except for financial institutions, which must disclose their social and environmental policies pursuant to a resolution issued by the Brazilian National Monetary Council, the Brazilian Securities Commission requires listed companies to inform only their corporate governance structure and practices and whether they disclose socio-environmental information and the exposure to social and environmental risks related to their activities. Therefore, the disclosure of information by non-financial listed companies as to their ESG strategies and policies is entirely voluntary.

Local officers of Brazilian corporations have been taking into account ESG factors and adopting integrated reports in accordance with the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC) framework in order to attract foreign and institutional investors.

Associations formed by financial market players, such as the Brazilian Financial and Capital Markets Association (Anbima), have prepared non-binding best practices codes recommending that asset managers and institutional investors analyze relevant ESG factors in order to fulfill their fiduciary duties. According to a 2018 research by Anbima, 48.54% of asset and fund managers declared having some kind of ESG policy and stated that the preferred ESG investment strategy is the “best-in-class” one, whereby a ranking is created establishing the best industries or projects to receive investments according to a previously chosen ESG criterion.

Regardless of the stance taken by the Brazilian government, companies should be eager to maintain a green corporate image as banks and foreign investors pressure for sustainable goals. The three largest non-state owned banks in Brazil, for example, have recently stated that they will no longer fund companies that do not commit to the preservation of the Amazon rainforest.

While no specific rules on ESG-related factors have been adopted to date by relevant authorities, the Brazilian legal framework is already equipped with general rules that allow companies, managers and funds to analyze these factors in their investment decisions.

Provisions in the Brazilian Corporations Act can be read to mean that corporations subject to Brazilian law should adopt ESG rules. The act requires that the controlling shareholder shall use its power to make the company accomplish its purpose and perform its social role. Accordingly, companies have to “perform their social role” when carrying out their activities. That is, corporations subject to Brazilian laws are required to consider other interests in addition to shareholders’ and the company’s, which can include interests of workers, consumers, other stakeholders and the community at large.

The setting is favorable for ESG investments. The integration of ESG and finances contributes to a complete analysis process of the investment that by effectively assessing the risks involved tends to lead to better performance over the long-term.

Photo: Diego Padgurschi / Folhapress