As the importance of ESG reporting grows, companies and law firms across Latin America are making sure they are prepared to comply with any new regulations
The relevance of environmental, social & governance (ESG) factors is on a steady ascent, with regulations adopted by the European Union that exert increasing extraterritorial influence. As global awareness of sustainable practices grows, many nations are taking steps to ensure that businesses align with responsible standards, not only within their borders but also in the broader international landscape.
The effect of such regulations is evident in supply chains, for example, where firms and consumers in these countries are becoming more discerning. There is a growing reluctance to import products from companies that engage in operational practices that may involve modern slavery or child labor, or that do not comply with environmental laws and standards.
The alignment of the EU with these new laws reflects the growing trend in which the demand for ethically produced goods is becoming a non-negotiable aspect of international trade, emphasizing the global impact of ESG considerations in shaping commerce and cultivating a more sustainable global economy. Not surprisingly, enterprises in Latin America are beginning to face the evolving reality that, in order to maintain access to lucrative markets and especially those throughout the EU region, they must align their production processes with the global ESG agenda.
At present, most businesses across Latin America that choose to embrace ESG principles often do so voluntarily, recognizing the potential for unlocking greater financial and commercial opportunities. A significant change of paradigm is on the horizon, however, as several Latin American governments have made the enforcement of mandatory ESG disclosure requirements for companies part of their agenda.
Progress towards a more responsible business climate
Over the past few years, Latin America has witnessed significant advancements in fostering a more responsible business environment, marked by the implementation of local and global frameworks and collaborative initiatives aimed at promoting sustainability and corporate governance. To enhance transparency and encourage sustainable business practices, the Colombian Stock Exchange collaborated with the Global Reporting Initiative and jointly launched the Guide for the Preparation of ESG Reports for Issuers in Colombia in July 2020. The Guide serves as an instrument to encourage the disclosure of sustainability reports aligned with international standards.
In a parallel effort, Chile’s Financial Market Commission (CMF) issued in November 2021 the General Rule No. 461, which requires targeted issuers to disclose their sustainability and corporate governance performances — which must be aligned with the Sustainable Accounting Standards Board framework — in their annual reports. In addition, the CMF also released a structured Guide for better practice and compliance of Rule No. 461.
Brazil, the biggest economic powerhouse in the region, has recently announced one of the most important developments on its ESG agenda. In October, the Brazilian Ministry of Finance and Securities and Exchange Commission declared its commitment to integrate the International Sustainability Standards Board’s International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards (IFRS S1 and IFRS S2) into the country’s regulatory framework, becoming the first country in the region to do it. Brazilian authorities have outlined a comprehensive plan, initiating a voluntary adoption phase starting in 2024 and progressing towards mandatory implementation by January 2026. This strategic approach underscores Brazil’s commitment to aligning the business landscape with international sustainability norms, setting a precedent for responsible corporate conduct in Latin America.
Pressure on businesses to comply with ESG
There is no question about the benefits that flow down to society and the environment when more companies adopt ESG strategies. Still, pressure from the markets and the imposition of new mandatory regulation to comply with ESG can poses certain challenges and concerns for companies.
Bruno Camargo — a legal expert on ESG with significant experience in anti-corruption, antitrust, and corporate remediation — identifies two potential risks that firms in Latin America will face under this landscape: greenwashing and greenhushing, along with unsubstantiated and fraudulent assessments impacted by corruption, lack of adequate legal oversight, and poor corporate governance.
Companies in the region, in order to be competitive for external markets or comply with the law, could be motivated to make exaggerated or misleading claims about their environmental and social friendliness, explains Camargo. In contrast, other companies could be incentivized to under-report their sustainability practices in order to avoid criticism and scrutiny, or for other particular reasons. Additionally, the urge to establish a presence in the green business arena may push organizations to perform transactions as they have always done without the adequate legal lenses that will shape their future impact and sustainability. These measures will be key for doing business with the European Union, for instance, as soon as early 2024.
Lawyers will play an essential role
Importantly, legal professionals will perform a critical part in advising companies for best practices, according to Camargo. As professional guidance, he recommends that lawyers engage in a pivotal role by which they substantiate their clients’ reports and also provoke them to disclose their results when they act properly and could benefit from such disclosure. This is crucial to balance risk and opportunities to ensure that ESG initiatives contribute meaningfully to a sustainable and responsible corporate environment in the region, Camargo adds.
The change in the business dynamics in order to promote better transparency, accountability, and responsible corporate practices is unavoidable. As corporations in Latin America adapt to the new landscape, the convergence of voluntary ESG initiatives and coming mandatory regulation is poised to reshape the region’s economic landscape, emphasizing the link between sustainable business practices and long-term international success. Not incidentally, law firms and their lawyers will have a significant role to play in the transition.