Brazil must strengthen ESG compliance amid growing regulatory pressure

Growing concerns about environmental, social and governance (ESG) compliance have led to increased scrutiny of corporations. Regulators in the US and UK have taken steps to distinguish genuine ESG efforts from cosmetic ones. Brazil also needs to establish effective measures in light of its exposure to EU regulations.

In April 2023, the European Parliament’s Legal Affairs Committee backed the Corporate Sustainability Due Diligence Directive (CS3D), which aims to make companies more accountable for their environmental and human rights impacts, including those of their subsidiaries and value chains. CS3D builds on legislation such as the German Supply Chain Due Diligence Act and the French Potier Law, but places emphasis on proportionality to a company’s turnover rather than the size of its workforce.

CS3D mandates the identification, prevention, mitigation and accounting for operational impacts on human rights and the environment. Enhanced due diligence requires integrating sustainability into company plans, operations and supply chains, with monetary penalties for violations. It also enables victims to seek compensation through civil liability claims.

The Brazilian ESG framework is comprehensive, but lacks a focus on subsidiaries and supply chains. Law No. 6.404/1976 requires companies to disclose ESG information in annual reports. The Brazilian Securities and Exchange Commission (CVM) Regulation of 2009 (CVM No. 480/2009) promotes transparency of environmental, sustainable development and social responsibility initiatives. However, Brazilian regulations have conceptual gaps that hinder consistent enforcement.

EU directives have influenced Brazil’s regulatory framework, but measuring the effectiveness of ESG principles remains a challenge. Brazil’s political instability further complicates consistent ESG enforcement. Joint efforts are needed by regulators and companies to create models that align with international standards and address Brazil’s unique challenges. The CS3D roadmap and focus on the supply chain can help Brazil fill regulatory gaps by facilitating better ESG enforcement.

Sources:

https://www.kroll.com/en/insights/publications/cs3d-impact-brazil-esg-compliance

https://assets.ey.com/content/dam/ey-sites/ey-com/pt_br/topics/climate-change/ey-brazilian-tax-reform.pdf