Status and Pitfalls of Environmental, Social and Governance Standards

ESG reporting standardisation across Latin America is a work in progress. The rationale for ESG reporting is to encourage mindful environmental, social and governance practices by companies in order to optimise their business for investors and society at large. In Latin America, as is the case globally, climate change has been a driving force behind increasing governmental, consumer and investor demands for ESG reporting standardisation.

Given the increasing calls for ESG information, a plethora of reporting frameworks and standards have emerged. International treaties arising out of United Nations (UN) conventions have played a large role in cementing countries’ commitments to address climate change, primarily through the 2015 UN Climate Change Conference (Paris Conference) and the 2021 UN Climate Change Conference (COP26). These conferences resulted in the Paris Agreement and the Glasgow Climate Pact, respectively, which have been catalysing the movement to hold countries and corporations accountable under ESG initiatives and regulations. Non-governmental organisations (NGOs) such as the International Financial Reporting Standards Foundation (IFRS) and its International Sustainability Standards Board (ISSB) are also promulgating global standards. Meanwhile, countries or region-wide bodies such as the European Union (EU) are adopting new legislation and regulations to impose ESG frameworks or regulations on listed companies or issuers.

This surge in treaty-based, intergovernmental organisation (IGO), NGO and national ESG frameworks and standard-setting is attributable to a surge in interest that is both top-down (commitments by governments) and bottom-up (changes in the values of customers, investors and the overall political environment). As a result, there is an exponentially increasing demand for transparency, disclosure and uniform standards for ESG principles. As stated by the ISSB, ESG standards and frameworks create a lens for reviewing how environmental, social and governance factors create or erode the value of an enterprise, impact its financial returns and affect how it is viewed by consumers of general financial information. When countries pledge to meet ESG targets and to produce ESG reports through international treaties and other commitments, they in turn directly pursue ESG-minded investments and also encourage, or even require, companies in their jurisdiction to do the same.

The ESG reporting frameworks and standards discussed in this chapter are distinct from green bond or sustainable bond frameworks and standards, which will be discussed in more detail in Chapter 3. As a general matter, green bond and sustainable bond regimes are linked to specific bond issuances, while ESG reporting regimes are tied to countries or companies. The former is voluntary – a company may choose to issue a green or sustainability-linked bond or choose not to do so – while the latter may be voluntary or mandatory. The adoption by a country’s stock exchange of a voluntary green bond or sustainable bond framework may help set the stage for the development of a more robust domestic mandatory reporting regime, but the two processes are distinct in their focus.

While climate change has been on the minds of governments since the late 1980s and 1990s, it was really brought to the forefront with the Paris Agreement. The Paris Agreement’s central aim is to strengthen the global response to the threat of climate change by limiting global temperature rise this century to less than 2ºC above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5ºC. To do so, the Paris Agreement set a goal for countries to reach their peak emissions as early as possible but not later than 2030. While 195 out of 197 parties to the Paris Conference are signatories to the Paris Agreement, the goal of reaching peak emissions by 2030 will not be achieved.

To reevaluate the Paris Agreement in the context of further evolving interests, conditions and political climate, the UN countries once again met at COP26, which took place in November 2021 and resulted in the Glasgow Climate Pact. During COP26, participating countries agreed that the 2020s were a critical decade for carbon dioxide emissions, which they agreed must be reduced by 45 per cent to reach net zero by 2050. Participating countries also agreed to phase down coal power and to phase out inefficient fossil fuel subsidies. Developed countries were urged to deliver funding to developing countries in need of climate change prevention financing. COP26 provided important building blocks to modify and advance the implementation of the Paris Agreement, and at COP26 the IFRS established the ISSB in an attempt to develop a comprehensive global framework for sustainability disclosure.

With respect to IGO frameworks and standard setting for ESG criteria, the UN has also long led the way. In 2015, the UN Summit adopted 17 sustainable development goals (SDGs) as a call to action for UN Member States. The goals are aimed at helping UN Member States to work towards world peace, sustainability and prosperity. While many of the SDGs are also related to climate action, such as clean water and sanitation, affordable and clean energy, and sustainable cities and communities, others relate to social aspects such as poverty and hunger. The SDGs are regularly monitored every year when the UN Secretary General presents an annual SDG progress report. While the SDGs are important as an overarching set of goals for the international community that push countries towards greater ESG awareness and action, they are not tailored for implementation at the level of an individual company.

One NGO that has been actively developing ESG criteria for companies is the Global Sustainability Standards Board (GSSB), which established the Global Reporting Initiative (GRI). The GRI Standards purport to enable organisations – large or small, private or public – to understand and report on their impact on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development. GRI’s standards are divided into the Universal Standards, New Sector Standards and the Topic Standards. The Universal Standards apply to all reporting organisations and incorporate reporting on an organisation’s activities, governance and policies and material topics, including the organisation’s most significant impacts on the economy, environment and people, including human rights. Organisations use the Sector Standards to determine which sectors apply to their relevant material topics and what information to report for those material topics. Examples of Sector Standards include oil and gas, coal, and agriculture, aquaculture and fishing sectors. The Topic Standards list disclosures relevant to particular topics, such as economic performance, procurement practices and anti-corruption.

Another NGO, the IFRS, which established the International Accounting Standards Board (IASB) for accounting standards, has now established the ISSB for sustainability disclosure standards. The ISSB assumed responsibility for the Sustainability Accounting Standards Board (SASB) Standards in August 2022 and is encouraging preparers and investors to use the SASB Standards until the IFRS Sustainability Disclosure Standards replace the SASB Standards. The IFRS Sustainability Disclosure Standards Exposure Drafts for IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 – Climate-related Disclosures (IFRS S2), were published in March 2022 and comments were required to be submitted by 29 July 2022. The ISSB’s stated goal is ‘to build on the work of existing investor-focused reporting initiatives to become the global standard-setter for sustainability disclosures for the financial markets’. The exposure drafts build on the content from various other organisations, including the Task Force for Climate-related Financial Disclosures, the Value Reporting Foundation Reporting Framework and SASB Standards and the World Economic Forum’s Stakeholder Capitalism Metrics.^[2]

As detailed above, governments and companies in Latin America attempting to adapt to the growing pressure for ESG information face a daunting and often overlapping set of reporting frameworks that vary in detail and scope from IGOs, NGOs and, as discussed further below, their respective countries. The various layers of frameworks and standards that may be relevant to a particular company can cause confusion, result in substantially overlapping or duplicative requirements, and necessitate the expenditure of significant resources. Conversely, the patchwork reporting environment can present opportunities for companies to ‘greenwash’ or take advantage of ambiguities to exaggerate their sustainability credentials. The branding benefits of touting company ESG credentials are currently outpacing the world’s ability to effectively evaluate ESG authenticity – as a surprisingly poignant example, COP27 taking place in Egypt in November 2022 is being sponsored by Coca Cola, which has consistently been named by industry watchdogs as the world’s single biggest plastics polluter.^[3] In response to these issues, some organisations, such as the We Mean Business Coalition (WMBC), a group of sustainable business and investment-focused organisations, including Ceres, CLG Europe, Climate Group and The B Team are rallying for a global baseline of ESG disclosure standards. They wrote a letter to the GRI addressing the potential downsides when it comes to varied and inconsistent ESG reporting. The letter was also addressed to, among others, the ISSB. The WMBC’s letter addresses the imminent risk of climate change and the importance of standardised reporting in order to meet the goals set by the Glasgow Climate Pact.

Setting a global standard is a significant undertaking, and the ISSB is smartly building upon a decade of work by the SASB in developing industry-specific guidelines in the ISSB’s drafts of IFRS S1 and IFRS S2. The IFRS already provides a global framework and standard-setting regime for accounting and financial reporting, and the IFRS and ISSB are using similar conceptual frameworks in the IFRS S1 and IFRS S2. In certain respects, the approach taken in the IFRS S1 and IFRS S2 can be likened to the ‘risk factors’ section of an offering memorandum – reporting entities must assess the potential material risks to their own value, describe those risks, and describe the processes and management practices they have in place to mitigate those risks. In addition, companies are required to set objective ESG metrics and targets. An inherent challenge with the type of reporting required by IFRS S1 and IFRS S2 is that judgment is required to determine whether a risk is material to the company in question. Further, the company must make a good faith representation of the risks it faces – that is, it cannot understate or overstate particular ESG- or climate change-related risks or benefits. This means that there is always a lurking possibility that bias may be embedded in the reporting. This is not unlike financial reporting. However, to date, unlike financial statements that are required to be audited on annual basis, frameworks such as the ISSB IFRS S1 and IFRS S2 do not require an opinion of independent third-party ESG auditors. Despite the ISSB’s comprehensive and thoughtful approach, these subjective criteria permit the possibility of greenwashing. Another potential difficulty with IFRS S2 for smaller companies is that it strongly encourages climate-change risk scenario analysis, which is something that could require substantial resources or be outside of the capabilities of a smaller enterprise.

Following its review of the comments submitted to the ISSB by 20 large global asset managers, Morningstar noted that the comments showed very broad support for the ISSB to establish a ‘global baseline’ for investor-focused climate and sustainability reporting, with some respondents specifically highlighting their belief that ISSB’s proposed IFRS S1 and IFRS S2 would help align differing requirements across countries. However, the group had differing opinions on the definition of materiality, the scope of required emissions disclosures, and the level of alignment with parallel regulatory initiatives in Europe and the US.^[4] These challenges aside, the ISSB approach is comprehensive and builds upon years of prior work in ESG reporting. Once the ISSB incorporates the comments received to its drafts of IFRS S1 and IFRS S2, it will move toward publication of these standards, which are likely to be used more widely around the globe than any other single set of ESG standards have been previously. Such widespread adoption should over time lead to standardisation of information, which will ultimately enhance the ability of regulatory bodies, consumers and investors to review and understand such information.

By way of comparison, in the international project finance market, the International Finance Corporation’s (IFC) Performance Standards have long been considered the gold standard for environmental and social requirements in loan documents. Indeed, these standards typically set more comprehensive environmental and social requirements than the laws and regulations in the relevant countries where the projects are being developed. In response to growing pressure for transparency about the projects financed by international commercial banks, as well as a desire to avoid reputational damage when those projects became mired in environmental and social controversies, the voluntary ‘Equator Principles’ were first launched in 2003 and are predominantly based on the IFC Performance Standards. Nearly all major international commercial banks have since voluntarily adopted the Equator Principles and require them in their transactions, which has created an environment in which the Equator Principles are essential to most international project finance transactions. While the ESG frameworks and standards in Latin America are currently predominately voluntary in nature, the hope is that the GRI or the ISSB will emerge in the coming years to provide a similar uniform and universal framework and set of standards for ESG reporting that could help to harmonise standards across countries, while also potentially raising the bar.

Turning to Latin American governments, the current landscape includes a variety of stages of adoption and implementation of ESG frameworks and standards. The balance of this chapter will review the approaches taken to date in Argentina, Mexico, Brazil and Chile, each of which is a party to the Paris Agreement and was a participant in COP26. In some jurisdictions, such as Argentina and Mexico, broad policy commitments, such as adherence to the Paris Agreement and COP26, have been adopted, and green or sustainable bond guidelines have been issued, but the more granular implementation of mandatory company reporting has not yet been developed. On the other hand, Brazil and Chile have established mandatory reporting through stock exchange rules and regulations.

Argentina is taking its first steps towards creating ESG frameworks and standards through investment-specific capital markets tools, but to date there are no mandatory company-focused reporting regimes in the country. ESG standard-setting has been undertaken by the Comisión Nacional de Valores (CNV) (the Argentine stock exchange regulatory agency), which issued regulation No. 896 in July 2021 to provide tools to expand ESG investment opportunities in financial instruments, including the Guide for Socially Responsible Investment (SRI) in the Argentine Capital Markets (SRI Guide), the Green Bond Guide and the Guide for External Review. The SRI Guide includes a definition of SRI, a guideline for SRI strategies, an analysis of the benefits of SRI and a survey of the development of SRI in Argentina. The Green Bond Guide defines, and touts the benefits of issuing, social, green and sustainable bonds and provides a step-by-step guideline for complying with International Capital Markets Association (ICMA) guidelines for such bonds. Finally, the Guide for External Review includes the key considerations about the external reviewer’s role, the benefits of the external review, and the ethical and professional standards applicable to the external reviewer.

In addition, Bolsas y Mercados Argentinos (BYMA), the securities market successor of the Buenos Aires Stock Exchange, also launched its first sustainability reporting framework in 2019, based on the GRI standards. BYMA has included rules that require issuers of green and sustainability-linked securities to issue a sustainability report and to submit it together with the issuer´s annual accounting documentation. While Argentina lacks mandatory reporting frameworks for companies, the establishment of green and sustainability-linked rules for bond issuances could help foster the further development of ESG reporting in the country. In particular, the CNV’s Guide for External Review and BYMA’s external review requirement for green and sustainable bond issuances are notable developments in the area of third-party compliance review.

In the past few years, Mexico has taken steps to adhere to and implement international ESG treaties, such as its 2015 signature of the 2030 Agenda for Sustainable Development created by the UN.^[5] Additionally, the Mexican government has created specific government bodies such as the National Council of the 2030 Agenda, which is charged with analysing and establishing high-level public policies aligned with the 2030 Agenda, and the Sustainable Development Goals Specialized Technical Committee, which is responsible for monitoring all indicators and evaluating currently existing public policies with the aim to comply with SDGs.^[6] Moreover, in an effort to create consensus between the different levels of government, the National Governors’ Commission created the Executive Commission for the 2030 Agenda to align the efforts made by Mexican states and municipalities on the SDGs.^[7]

Mexico has not yet implemented any mandatory ESG requirements that must be met by local issuers to issue financial instruments in the local stock market. However, the two national stock exchanges, the Bolsa Mexicana de Valores (BMV) and Bolsa Institucional de Valores (BIVA), have started to implement a series of ESG standards for issuers that desire to be considered ‘ESG-compliant’.^[8] The BMV has issued the ‘BMV Substantiality Guide’, a voluntary guide with the purpose of evaluating the development of strategies and level of compliance with ESG standards.^[9] The self-diagnosis test (Autoevaluación del nivel de Madurez en Sustentabilidad) is promoted by the BMV and published on its website, but is voluntary. Other reports such as sustainability reports can also be found in the issuers’ portal of the BMV website. For two years, the BMV and S&P have published the S&P/BMV Total Mexico ESG Index to highlight the companies that comply with sustainability standards, based on certain sustainability evaluation criteria (Evaluación de Sustentabilidad Empresarial). Currently, 30 companies form part of this index. For its part, the BIVA launched the Chief Sustainability Officer Acceleration Program, a programme that seeks to enhance and accelerate the integration of corporate sustainability in current and future issuers.^[10]

On 29 April 2022, the Mexican National Banking and Securities Commission (CNBV), in collaboration with the Global Green Growth Institute (GGI), developed the ESG Self-Diagnosis Tool (Herramienta de Autodiagnóstico ASG) aimed for the participants in the Mexican financial markets.^[11] This tool is of voluntary use for financial institutions to monitor its progress, know its opportunity areas and receive recommendations for improvement. CNBV will treat all information as confidential but will publish certain results in its website. Given how new this tool is, its impact has not yet been evaluated.

Meanwhile, regulators in Brazil have been responding to the push for ESG criteria in reporting and investing with mandatory reporting requirements, and have been developing what are arguably the most advanced domestic ESG frameworks and standards in the region. For example, the Brazilian Securities and Exchange Commission (CVM), the Brazilian agency that regulates publicly traded companies, already requires such companies to provide ESG information in their Reference Form (Formulário de Referência), an annual report that is filed with the CVM and requires a comprehensive overview of the publicly traded company’s business and financial condition.

CVM Instruction No. 480, which is currently in force, mandates publicly traded companies to disclose in their Reference Form social and environmental information, such as social and environmental risk factors and practices, as well as governance information, such as corporate governance practices adopted pursuant to the Brazilian Corporate Governance Code for Publicly Traded Companies.^[12]

The ESG standards outlined by the CVM were recently enhanced by CVM Resolution No. 59, which starting in 2023 will require the disclosure of additional ESG information, with a focus on climate and diversity standards, based on a ‘comply or explain’ model (i.e., the publicly traded company must adopt and disclose in its Reference Form certain practices or disclose explanations for the non-adoption of such practices).^[13] New rules related to climate disclosure will require publicly traded companies to report, among other things, whether their annual ESG report considers the recommendations related to climate issues of any recognised entity, whether the publicly traded company makes greenhouse gas emission inventories, and applicable risk factors related to climate change (the current version of CVM Instruction No. 480 does not refer to ‘climate change’ risk factors specifically, but rather to social and environmental risk factors). New rules related to diversity disclosure will require publicly traded companies to report the number of members of their boards of directors and finance committees organised by their self-declared gender, race or other diversity attribute, as well as specific diversity characteristics and goals of their directors and officers.

In addition, in August 2021 the São Paulo stock exchange (B3 S.A. – Brasil, Bolsa, Balcão) (B3) began a public consultation on new ESG rules for listed companies, which is focused on diversity and inclusion standards.^[14] Consultation remained open until 16 September 2022. If approved, rules would require companies listed in the B3 to adopt certain ESG practices and include additional disclosures in their Reference Form, based on the ‘comply or explain’ model, including information about: (1) whether the company has appointed at least one woman and one representative of minorities as a director or officer; (2) criteria for those appointments; (3) whether the company has established ESG criteria for variable compensation of directors and officers; and (4) whether the company’s board of directors has approved a policy, code or report describing the company’s ESG guidelines and practices, including practices related to environmental protection, hazardous-waste management, elimination of discrimination and corporate governance and compliance mechanisms, among other practices.

B3 also created the corporate sustainability index (ISE B3) that is designed to measure the performance of companies listed in the B3 recognised for their commitment to corporate sustainability.^[15] The ISE B3 selection process is voluntary and takes place through several steps, including through filling out a questionnaire concerning different areas of the company (i.e., human capital, corporate governance, business model and innovation, capital stock and environment).^[16] The answers provided through this questionnaire are available to the general public on the ISE B3 website.^[17] The score obtained by each company based on this questionnaire is weighted together with, among other things, (1) the result of the company’s performance in connection with a climate change assessment and (2) the RepRisk Index, a reputational risk metric based on ESG standards. To be selected, each company must obtain a minimum score.

ESG policy developments are also on the horizon for other government and non-government Brazilian entities. For example, the Brazilian National Monetary Council (Conselho Monetário Nacional) (CMN), requires financial institutions to implement and disclose a social, environmental and climate responsibility policy.^[18] In addition, in 2021, the Brazilian Association of Financial and Capital Market Institutions (ANBIMA), a non-government self-regulatory organisation that exercises regulatory authority over the financial institutions that voluntarily register with it and that in 2021 had the largest Brazilian financial institutions by assets as its members, issued rules and procedures to mitigate greenwashing risks by identifying sustainable investment funds (including rules that require asset managers to maintain on their websites guidelines, rules, and controls related to sustainable investments).^[19],^[20] A survey conducted by ANBIMA in 2021 of 250 companies indicated that sustainability has become increasingly relevant to financial and capital market institutions in Brazil, but also shows that there are still several institutions that do not disclose effective ESG practices.^[21]

Like Brazil, Chile’s domestic ESG frameworks are somewhat more developed than other Latin American countries. The Financial Market Commission (FMC) issued General Rule No. 385 in 2015, requiring listed companies and other issuers of publicly traded securities the obligation to complete a simple, general questionnaire (FMC Questionnaire) regarding the actions they took during the last fiscal year concerning the improvement of their corporate governance, their engagement in social responsibility activities, and their development of sustainable projects and operations.^[22] The FMC Questionnaire’s main objective was to introduce to the market, and to the knowledge of the regulators, information on how the companies intended to advance the sustainable practices that the developed capital markets began to discuss some years before. 

A year later, the Santiago Stock Exchange (SSE) realised sustainability in the operations of listed companies was not only a concern of the FMC, but also of the companies themselves, which were especially interested in publishing their results in this regard. Accordingly, the SSE analysed the Chilean stock market and concluded that, at the time, about 44 per cent of the issuers in the market disclosed information regarding whether their strategy, investments, projects, and operations follow ESG criteria.^[23] Specifically, companies disclosed the information primarily by presenting a Sustainability Report released within their mandatory annual report – in addition to the required FMC Questionnaire. Interestingly, this was before Chile had any regulations requiring issuers to disclose the ESG criteria of their investments, projects and operations in their annual reports.

Following the results found in its analysis, in 2017 the SSE published a Sustainability Reporting Guide (SR Guide) to promote the benefits of ESG criteria within the Chilean market and to inform its key players on how to prepare sustainability reports for investors. The SR Guide was based on the Model Guidance on Reporting ESG Information to Investors prepared by the United Nations Sustainable Stock Exchanges Initiative.

Since then, ESG reporting criteria has continued to grow in Chile. In 2021, the FMC issued regulations that require listed companies to disclose in their annual reports the implementation of ESG criteria as part of the organisation’s strategy and operations.^[24] General Rule No. 461, issued by the FMC in November 2021, eliminated the provisions established by General Rule No. 385 and obliges listed companies and other issuers of securities to disclose their compliance with ESG criteria throughout their annual reports, establishing minimum and specific disclosure requirements.^[25] Consequently, ESG criteria will be integrated into every essential aspect of the company’s annual report (company profile, corporate governance, strategy, people, business model, supplier management, and legal and regulatory compliance indicators) rather than being incorporated via a separate ‘sustainability’ report or section within their annual reports.

Further, the SSE has also been providing substantial support to issuers seeking to comply with General Standard No. 461. For example, the SSE and the GRI recently issued the Sustainability Reporting and Disclosure Guide for Chilean Issuers at the end of 2021, to guide issuers, regardless of their size, on how to comply with the new FMC regulation and with the highest global standards.^[26] In September 2022, the FMC also issued the Implementation and Supervision Guidance for Section 8.2 of General Rule No. 461, which provides guidelines for companies to facilitate the implementation of General Rule No. 461 as expected by the FMC.^[27] Furthermore, all annual reports of publicly traded companies in Chile must be made available to the public on the FMC website,^[28] including the requirements mandated by General Rule No. 461 on ESG criteria.

Recently, a report in the Chilean economic and business newspaper El Pulso highlighted that in the country there is currently a high level of disclosure of compliance with ESG criteria by local companies.^[29] According to the report, a study by Evalueserve analysed the ESG compliance of the 30 companies that are listed in the S&P IPSA, concluding that most of them successfully anticipated the need to disclose their progress in sustainability according to international standards, the issuance of General Rule No. 461 and their need to comply with it. Specifically, the study showed that 57 per cent of S&P IPSA companies already use the SASB Standards to report compliance with ESG criteria.^[30] Moreover, the study noted that Chilean companies generally have experience in using international standards; thus, the incorporation of SASB Standards – and thus the compliance with General Rule No. 461 – should not represent a significant difficulty.

To comply with varying standards from IGOs, NGOs and their state governments, companies in Latin America must devote substantial resources, including but not limited to making new hires, creating new positions, hiring outside consultants and even creating entirely new departments, in order to ensure compliance with the relevant ESG standards. There has been, and there will continue to be, a significant learning curve. While complying with the various layers of ESG standards simultaneously can be a daunting prospect, the GRI and the ISSB are attempting to create frameworks and set standards that can dictate best practices globally.

While global standardisation is not a substitute for the hard work that countries and companies must undertake to understand ESG criteria and incorporate them into their governments and businesses, a global framework that sets a high bar will have salutary effects on the development of ESG frameworks and standards worldwide. As Latin America continues to adapt to an increasingly ESG-focused world, IGOs such as the UN, NGOs such as the GRI and ISSB, and pace-setting countries such as Brazil and Chile, will lead the way. As a closing observation, while ESG framework standardisation is a welcome and positive development, ESG reporting in Latin America will likely continue to be plagued by opacity and potential greenwashing until an independent, third-party ESG auditing requirement also becomes commonplace.

Notes