With the newly announced mandatory ESG reporting for publicly traded companies in Brazil starting in 2026, lawyers will play a key role in successfully guiding businesses under the new structure
The unprecedented actions from Brazil towards environmental, social & governance (ESG) reporting for publicly traded companies has set off a new reality in the country’s corporate environment.
For some years now, the Brazilian Securities Commission (CVM) has been diligently adapting their ESG policies in accordance with the changing demands of the markets and investors. In 2020, for example, CVM first approved a regulation that aimed to make voluntary ESG-integrated reporting more comparable and transparent among companies by forcing them to adopt a consistent framework. The following year, CVM initiated a public consultation to discuss changes to its Reference Form — a document that publicly traded companies in Brazil must submit every year and keep updated with very specific information — to make it shorter and include ESG reporting. CVM then adopted the comply or explain concept under which companies were required to disclose ESG information or provide an explanation if they chose not to disclose it.
Later on, after the release of the International Sustainability Standards Board’s (ISSB’s) first two International Financial Reporting Standards (IFRS S1 and IFRS S2) in mid-2023 and following the recommendation of the International Organization of Securities Commissions (IOSCO), CVM became the first securities commission in the world to make such ESG reporting mandatory for publicly traded companies from 2026 onwards.
Despite the fundamental correlation with a company’s financial statement and the fact that assurances from independent auditors are required in Brazil, companies should not regard this change in regulation as a new accounting rule, says Henrique Antunes, a legal professional with extensive experience in capital markets and ESG matters. Antunes explains that this is a reporting rule, which includes disclosure about governance, strategy, risks, and opportunities related to the company’s sustainable performance, and demonstrates the impact of ESG matters on a company’s cashflows, access to finance, and cost of capital. Complying with this new regulation will require collaboration between a company’s legal, accounting, sustainability, and investor relations teams to be successful.
Key actions for compliance
Among other professionals involved, the role of lawyers will be critical to guide companies through CVM’s new structure. According to Antunes, the following actions will be key for lawyers to ensure a successful compliance process:
Connect information and disclosure criteria among already disclosed reports — An advantage for law firms will be the ability to connect information already gathered from the company. Publicly traded companies in Brazil disclose financial reports and annual reports (formulário de referência), and most of them already disclose some type of sustainability data. Lawyers need to ensure that the information and data presented among these reports and other materials, including press release and policy statements, is consistent. It also is important to highlight that many companies are already following certain methodologies for their sustainability reports, a practice that could make the adaptation of the new ISSB requirements easier.
Understand the client’s business and industry — Lawyers also need to understand the unique needs and relevant factors for each client, based on their specific business and industry. By assisting clients in recognizing what is material under the definition used by ISSB and effectively presenting this information to investors, lawyers can improve the quality of disclosure and, consequently, enhance the safety and reliability of the management’s responsibilities and liabilities.
Additionally, lawyers will also need to go beyond their legal expertise and discuss with the management team the negative or positive impact of any ESG activities on the company’s operations, financial situation, and strategy. In this sense, law firms will need to leverage their legal expertise to ensure that clients consider, address, and disclose every premise and methodology, based upon their particular situation. A solid disclosure, based on appropriate sustainability metrics, well-assessed risks, and fully mapped opportunities, will not only protect a company from greenwashing claims, but assist management’s decision-making process and ultimately positively impact investor perception.
Brazil, with its significant economic influence, rich biodiversity, and natural resources, is now at the forefront of this transcendent change.
Improve targets and corporate governance — Previously, ESG reporting was mostly used as a marketing strategy for many companies. With the new mandatory reporting, however, responsibility, exposure, and risk also increase. Businesses will have to perform a careful assessment to set targets, identify premises, collect data, and backup their methodologies for disclosure. Moreover, future lawsuits may question the basis of how and why a company’s previously established targets were changed or not met. Therefore, setting the disclosed targets correctly is imperative for companies to be able to defend themselves in legal challenges ahead and avoid any reputational crises that could occur. Indeed, firms and their clients need to understand that this forward-looking information is becoming more and more sensitive in investors’ decision-making process.
In addition, as ESG activities continue to become increasingly important for investors, there is a growing responsibility for companies to enhance their governance structures. Law firms may need to advise companies to create new policies or committees, such as a sustainability committee that reports directly to the board of directors, which can also improve the company’s ESG rankings. Legal professionals will be an effective instrument of education, guidance, and consultation for senior management in relation to sustainable business governance, bringing the importance of ESG aspects to bear on management’s critical roles: fulfillment of their fiduciary duties and the creation of long-term value for companies.
Collaborate with different practice areas — The mandatory sustainability reporting will require lawyers with experience in different practices to work together to best achieve integrated solutions. While capital markets or corporate lawyers may be the most experienced with disclosure and governance, cooperation with environmental professionals will be pivotal to understand the complexity around many aspects of ISSB’s standards, such as the Scope 1, 2 and 3 category system. Further, collaborating with the litigation team will allow the lawyers working on ESG reporting to anticipate litigation trends and avoid potential dispute risks.
Adopt a proactive approach towards the rapidly evolving needs of the markets — Brazil’s ESG disclosure regulation is not expected to remain static. Upcoming developments include the implementation of future IFRS S3 and IFRS S4 rules, which involve discussions around nature and biodiversity to expand environmental aspects beyond the realm of climate change. Even if the term ESG changes or is replaced for another term in the future because of political controversies, the momentum behind these initiatives is expected to increase, especially in Brazil. As a result, lawyers who keep up with the evolving demands of the markets and remain prepared will be ahead of the game.
Act now: experience and practice will be critical — Many companies, especially the largest ones in Brazil, may not wait until 2026 to start disclosing their ESG reports. Indeed, incentives (often in the form of reliefs) will nudge them to start earlier, even during the voluntary phase. Because this is an unprecedented regulation and the new ISSB reporting standards are not done on a check-the-box type of form, legal professionals’ experience and expertise from different practice areas will be a key aspect to mitigate risks and achieve success. Lawyers who begin ESG discussions with their clients now — especially around how to structure the disclosure report by evaluating potential governance and disclosure improvements, for example — will be at an advantage over their competitors for upcoming business transactions involving the company and for future implementation of new reporting rules.
Brazil, with its significant economic influence, rich biodiversity, and natural resources, is now at the forefront of this transcendent change. And with the South American powerhouse leading this transition, other countries are expected to follow, each with their own agendas but sharing a common goal. Meanwhile, increasing occurrences of natural climate disasters in the region — such as the recent deadly floods in Rio Grande do Sul — will continue to underscore the importance of governments and corporations to start taking meaningful action in this area.
