Sustainability Policies and Practices for Corporate Governance in Latin America

7. Corporate governance frameworks

Abstract

This chapter highlights recent regulatory developments related to sustainability disclosure across twelve jurisdictions and the European Union. It comprises key information about sustainability reporting standards, third‑party assurance, and proportionality.

In recent years, legislators, regulators, and stock exchanges worldwide have been increasingly active in developing rules and guidance for sustainability disclosure by listed companies. This chapter summarises the key provisions in regulatory frameworks across the analysed jurisdictions, including China, the European Union, India, Japan, the United Kingdom, and the United States, as well as Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, and Peru.

Sustainability information is understood for the goals of this report as environmental and social data and facts. This information would, in many cases, be non‑financial (e.g., GHG emissions), even though sustainability disclosure may be relevant for investors to estimate a company’s future cash flows and risk. Likewise, while sustainability disclosure may include issues relevant for corporate governance of a company (e.g., how it manages its climate related‑risks), this report’s focus is not on corporate governance disclosure (e.g., the number of independent directors and executives’ remuneration).

It should also be noted that in most (if not all) jurisdictions covered in this report, there has traditionally been an obligation for listed companies to promptly disclose all material information about their businesses. In some cases, therefore, companies have already been obliged to disclose environmental and social matters that are financially relevant for them. The sustainability regulatory frameworks considered in this report, however, go at least one step further specifically requiring or recommending the disclosure of sustainability information.

7.1. Sustainability disclosure regulatory frameworks

All jurisdictions analysed in this report have either required or recommended the disclosure of sustainability information by listed companies. The nature and scope of their regulatory frameworks, however, vary, as shown in Table 7.1. Among the thirteen jurisdictions, four adopt a recommendation for companies to disclose sustainability information under a “comply or explain” approach, meaning that they need to either disclose the information or explain why they do not do so. China, Costa Rica, and India, by their turn, recommend listed companies to disclose sustainability information, but they do not need to explain if they do not make such a disclosure. Other four jurisdictions have adopted specific disclosure requirements, and, in the case of the United States, the capital markets regulator is conducting a public consultation on requirements for climate‑related disclosure. In the case of Japan, the financial services regulator unveiled in November 2022 proposed regulatory revisions that would require sustainability disclosure.

In relation to the scope of the sustainability matters covered, it may be challenging to compare existing frameworks. For instance, while both Argentina’s and the European Union’s frameworks cover a broad number of sustainability matters, the regulation in the latter is significantly more detailed than in the former. Nevertheless, a clear separation does exist between jurisdictions that have a smaller or greater focus on climate-related matters (Brazil, Colombia, the United Kingdom, and the United States), and others that encompass a greater number of sustainability matters.

A rising trend among sustainability regulatory frameworks is either a requirement or a recommendation for companies to disclose verifiable metrics to allow investors to assess the credibility and progress toward meeting an announced sustainability-related goal or target. This policy does not mean that companies would need to adopt such goals but, if they do, they will need to provide sufficient information to make directors and key executives accountable. For instance, it may mean that a company that adopts a net‑zero GHG emissions commitment by 2050 would need to establish shorter-term targets, as well as adequately disclose its most recent emissions.

Table 7.1. Sustainability disclosure regulatory frameworks

Jurisdiction	Sustainability disclosure	Sustainability matters covered	Disclosure of metrics when a company sets sustainability related‑ goals	Key source
Argentina	C	A great number of sustainability matters	‑	Corporate Governance Code
Brazil	C	A great number of sustainability matters, with a focus in climate	‑	CVM Rule No. 80
Chile	B	A great number of sustainability matters	B	General Rule No. 30
China	R	A great number of sustainability matters	‑	CSRC Contents and Formats of Annual Reports
Colombia	B	A great number of sustainability matters, with a focus in climate‑related matters	B	External Circular No. 31
Costa Rica	R	A great number of sustainability matters	R	Guidelines to disclose ESG information for issuing companies
European Union	B	A great number of sustainability matters	B	Corporate Sustainability Reporting Directive (CSRD)
India	R	A great number of sustainability matters	‑	Circular on Business Responsibility and Sustainability Reporting (BRSR) by listed entities
Japan	B*	A great number of sustainability matters	B*	Proposed Revisions of the Cabinet Office Ordinance (in Japanese)
Mexico	B	Some sustainability matters	B	Circular of Issuers – Annex H and N
Peru	C	A great number of sustainability matters, with a focus on GHG, water, energy, and solid waste	B	Resolution No. 018‑2020‑SMV/02
United Kingdom	C	Climate‑related matters	R	FCA's Climate‑related Disclosure Regime
United States	B*	Climate‑related matters*	B*	SEC Climate‑Related Disclosures Proposal

Key: B = binding / requirement by the law, regulations or listing rule; C = comply or explain; R = recommendation by guidelines, codes, or principles; “‑ ” = absence of a specific requirement or recommendation. Information on jurisdictions with an asterisk (*) relates to proposals under consideration.

Notes:

¹ In Argentina, the national corporate governance code briefly mentions the need for the company to disclose sustainability information on its website, as well as to provide relevant corporate social responsibility information to its shareholders. The code follows an “apply or not, explain” approach, which means that the company must explain either how it implements the recommendation or why it does not do so. In addition, CNV’s public offering rules establish that prospectuses must include a description of the company’s environmental or sustainability policies and, in the event that the company does not have such policies, it must provide an explanation why.

² In Brazil, the comply or explain sustainability disclosure rule covers an open number of sustainability issues. Still, there are specific provisions asking companies to disclose climate related‑financially material information and GHG emissions (or explain why they do not disclose information on these specific matters). In addition, disclosure on some particular sustainability issues, such as the workforce composition according to gender and race, is binding.

³ In Chile, Financial Market Commission (CMF)’s General Rule No. 30 was modified in November 2021 to require corporate governance and sustainability disclosure in the annual report of the issuers of publicly offered securities. Article 10 of the Securities Market Law was modified in June 2022 to establish that entities registered in the Securities Registry carried by the CMF should provide information to the general public regarding their environmental and climate change impact, including the identification, evaluation and management of the related risks, as well as corresponding metrics. This provision is in addition to what article 9 establishes: an obligation of the issuers of publicly offered securities to disclose truthfully, sufficiently, and promptly all material information about their businesses.

⁴ In Mexico, the regulatory framework broadly establishes that public offer prospectuses and annual reports must include relevant sustainability information focusing on environmental matters. Specifically, with respect to environment related‑information, the regulation requires disclosure of climate risks that may affect the company, the material impact of laws related to this matter on its business, and whether the company has policies, certificates or projects related to environmental matters. The disclosure of social matters must be done in the annual reports and is specifically related to the number of unionised employees, the relationship with unions and the number of temporary workers.

7.2. Sustainability disclosure standards and assurance

An important policy question for jurisdictions developing their sustainability disclosure framework is to either choose an individual accounting standard or allow companies the freedom to report sustainability information within the framework that they understand to be the most adequate. The adoption of a single accounting standard facilitates the comparability of sustainability information from different companies, while this policy option may hinder the development of new standards that might address the needs of particular business sectors.

Table 7.2. Sustainability disclosure standards and assurance

Jurisdiction	Disclosure standard			Primary users		Level of assurance		Independent assurance
	Freedom to choose	Single
		Local	Global	Investors	Multiple stakeholder	Limited	Reasonable
Argentina	●	‑	‑	‑	‑	‑	‑	‑
Brazil	●	‑	‑	‑	‑	‑	‑	‑
Chile	‑	●	‑	●	‑	‑	‑	‑
China	‑	●	‑	‑	‑	‑	‑	‑
Colombia	‑	‑	TCFD+ SASB	●	‑	‑	‑	‑
Costa Rica	●	‑	‑	‑	‑	‑	‑	‑
European Union	‑	●	‑	‑	●	●	‑	By registered auditors
India	●	‑	‑	‑	●	‑	‑	‑
Japan	‑	‑	TCFD	●	‑	‑	‑	‑
Mexico	●	‑	‑	●	‑	‑	‑	‑
Peru	‑	●	‑	●	‑	‑	‑	‑
United Kingdom	‑	‑	TCFD	●	‑	‑	‑	‑
United States	‑	●*	‑	●	‑	‑	●*	Either by registered auditors or non‑auditors*

Key: “●” marks the regulatory option followed in the jurisdiction, but please refer to the previous table to see whether it is a requirement, a comply or explain provision, or a recommendation; “-” = absence of a specific requirement or recommendation; “●*” identifies proposals under consideration.

Notes:

¹ In Chile, regulation has set a local standard based on international frameworks (GRI, TCFD, Integrated Reporting), which is complemented by the requirement to disclose SASB metrics.

² In the European Union, the European Commission has the duty to assess, by no later than 1 October 2028, whether reasonable assurance is feasible for auditors and for reporting companies. If it is considered to be feasible, the Commission will have the authority to require a “reasonable” level of assurance.

³ In the United States, the proposed climate-related disclosures are similar to those that many companies already provide based on accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The proposed requirement for assurance would be restricted to GHG emissions scope 1 and scope 2. As proposed, a limited level of assurance would be required initially, and eventually the requirement would be scaled up to reasonable assurance.

Among the thirteen surveyed jurisdictions, five allow companies the freedom to choose (four Latin American countries and India). Among those jurisdictions that do choose a single sustainability accounting standard for all listed companies, there is also the alternative between adhering to an existing global standard and developing a local one. The three biggest surveyed jurisdictions (China, the European Union and the United States), as well as Chile and Peru, have chosen to develop a local standard, while Colombia, Japan and the United Kingdom have adopted the SASB Standards and/or TCFD’s Recommendations1.

Accounting standards provide only the framework for companies to report information publicly, but their executives will typically need to decide what pieces of information to effectively disclose. An important reference in such assessment is who would be the primary users of corporate disclosure. Traditionally, accounting standards for financial reports have considered investors and creditors to be the primary users of corporate disclosure, which typically means that only information relevant to their investment or voting decisions would need to be reported.

In seven surveyed jurisdictions, investors are considered to be the primary users of sustainability disclosure, while in the European Union and India not only investors but also stakeholders are among the primary users. In these two jurisdictions, a piece of information may need to be disclosed, for instance, if relevant for either employees or customers, even if the information is not reasonably expected to affect an investor’s decision to trade a company’s securities or how to vote in a shareholder meeting. In Argentina, Brazil and Costa Rica, however, it is not clear who would be the primary users of sustainability disclosure, which may be explained by the fact that such disclosure is not mandatory in any of these three countries and, therefore, companies may more freely decide how much sustainability information to disclose.

The assurance of sustainability disclosure by an independent third party – just like external auditing of financial reports – may enhance investors’ confidence in the information disclosed and the possibility to compare sustainability reports between companies. Only the European Union currently requires assurance of sustainability information, and the United States is considering establishing such a requirement. They only differ in two aspects. First, the level of assurance that would be required: a more limited one in the European Union and, after a phase‑in period, a reasonable level in the United States for scope 1 and scope 2 GHG emissions (reasonable is the level typically expected from external auditing of financial reports). Second, these two jurisdictions vary on whether the assurance service provider would need to be a registered auditor (the case in the European Union) or not (the proposal in the United States).

7.3. Flexibility and proportionality in sustainability disclosure

The disclosure of sustainability information evidently represents a cost for companies, which may be relatively fixed regardless of their size. In the case of smaller companies, therefore, the costs of accounting and reporting on sustainability information may not be justified by the benefits a company will have in attracting more funding for a possibly smaller cost. This is the reason why some policy makers have been flexible in relation to a company’s size when requiring or recommending sustainability disclosure (six surveyed jurisdictions as presented in Table 2.1)2. As shown in the notes to the table below, size categories include references to, among others, the number of employees, revenues, market capitalisation and total assets, without a clear preference for a specific benchmark.

The cost of disclosing sustainability information will also add to some other considerable costs a company incurs when going public. If the corporate governance framework is well‑designed, it is expected that any costs will be more than offset by the benefits for a company of being public. However, companies may choose to stay private if the short‑term costs of listing their shares are considerably higher than the immediate benefits of raising funds publicly. This may explain why sustainability disclosure provisions in the United Kingdom provide an exemption for high growth listing segments. The policy adopted in China and in the European Union of requiring sustainability disclosure from both listed and large non‑listed companies also has the consequence of keeping public markets attractive for a greater number of companies.

Another relevant consideration for policy makers when considering new requirements or recommendations for sustainability disclosure is the capacity of market participants to promptly conform to such a regulation. Companies and their service providers, as well as regulators themselves, may face a learning curve in their understanding of sustainability matters and might need time to develop adequate processes and good practices. With this consideration, six surveyed jurisdictions are considering or have already adopted phase‑in periods for sustainability disclosure requirements or recommendations. Such a policy may allow market participants to learn from the experience of larger companies, making it easier for smaller companies to access better guidance and to comply with the regulation in the future.

Table 7.3. Flexibility and proportionality in sustainability disclosure

Jurisdiction	Phase‑in of disclosure requirements		Flexibility for SMEs	Coverage of companies
	Yes / No	Year
Argentina	‑	‑	Yes	All listed companies
Brazil	No	‑	No	All listed companies
Chile	Yes	2023 ‑ 2025	No	All listed companies and certain financial institutions
China	‑	‑	‑	Both listed and non‑listed companies
Colombia	Yes	2024	Yes	All listed companies
Costa Rica	‑	‑	‑	All listed companies
European Union	Yes	2025 - 2029	Yes	Both listed and non‑listed companies, including some non-European companies
India	Yes	2021 ‑ 2023	Yes	Top 1 000 listed entities (by market capitalisation)
Japan*	No	‑	‑	All listed companies
Mexico	‑	‑	No	All listed companies
Peru	No	‑	Yes	All listed companies
United Kingdom	Yes	2023	No	Premium and Standard Market listed issuers
United States*	Yes	3 years	Yes	All public reporting companies

Key: Information on jurisdictions with an asterisk (*) after their name relates to proposals under consideration.

Notes:

¹ In Argentina, while small and medium enterprises (by the number of employees and revenues) do not necessarily need to report on how they are aligned with the Corporate Governance Code, they can and are encouraged to do so.

² The information above for Brazil is focused on securities regulation, but in September 2021, the Central Bank of Brazil (BCB) announced mandatory disclosure aligned with the TCFD’s recommendation for financial institutions. In the first phase, the rule will require the disclosure of qualitative aspects of governance, strategy, and risk management, and in the second phase, quantitative information will also be required.

³ In Chile, sustainability disclosure requirements will be applicable, after 2025, to all issuers of publicly offered securities (including all listed companies), as well as to other entities supervised by Financial Market Commission (CMF), including banks, insurance companies, general fund administrators, stock exchanges, and financial market infrastructures. These requirements will come gradually into force in accordance with the type of entity and its size in terms of consolidated assets, between 2022 and 2024, starting with the largest entities.

⁴ In Colombia, while disclosure in line with TCFD and SASB Standards are mandatory for group A companies (those included in the large market capitalisation index and those with assets larger than ~ USD 860 million or with revenues larger than ~ USD 430 million, or with more than 1 000 employees), companies in group B (autonomous trusts, private equity and collective investment funds) must disclose an explanation of the sustainability and responsible investment practices implemented by the firm. Companies in group D (issuers under temporary registration and pension bonds issuers) must follow a comply or explain approach regarding their TCFD and SASB‑aligned disclosure. For companies in group C (companies not included in groups A, B or D), TCFD and SASB‑aligned disclosure is optional. The companies do not need to explain if they do not disclose a sustainability report.

⁵ In Costa Rica, the disclosure of sustainability information by listed companies is only recommended by the capital markets regulator, so there is no phase‑in requirement or specific consideration for small and medium enterprises.

⁶ In the European Union, the application of the Corporate Sustainability Reporting Directive (CSRD) approved in November 2022 will take place in four stages: (i) reporting in 2025 for companies already subject to the 2014 Non-Financial Reporting Directive (NFRD); (ii) reporting in 2026 for large companies that are not currently subject to the NFRD; (iii) reporting in 2027 for listed SMEs; (iv) reporting in 2029 for third-country undertakings with net turnover above 150 million EUR in the European Union if they have at least one subsidiary or branch in the EU exceeding certain thresholds.

⁷ In Peru, companies listed in the alternative listing segment for small and medium enterprises do not need to disclose sustainability information nor (if it is the case) explain why they do not disclose such information.

⁸ In the United Kingdom, certain UK registered companies (UK Department for Business, Energy and Industrial Strategy, 2022[25])and Limited Liability Partnerships (LLPs) (UK Department for Business, Energy and Industrial Strategy, 2022[26]) are also required to publish climate-related disclosures based on TCFD recommendations. These requirements are different to those for listed companies.

⁹ In the United States, the proposed phase‑in would vary depending on the size of the company (the larger the company, the shorter the period to start disclosing climate‑related information) and depending on the nature of the disclosure (certain disclosures, such as GHG emissions reporting, have a longer phase in). The flexibility for SMEs (“non‑accelerated filers”) would also be related to external assurance requirements (smaller companies will not need to provide assurance).

Notes

← 1.  For more information on SASB Standards and TCFD’s recommendations, see the report Climate Change and Corporate Governance (OECD, 2022, pp. 15-18[1]).

← 2.  The use of a recommendation instead of a requirement to disclose sustainability information evidently allows – at least from a legal point of view – smaller companies not to disclose such an information (Table 7.1). However, depending on market practices, a recommendation – especially if companies need to explain why they do not comply with it – may in practice force most companies to disclose sustainability information. This may be the reason why Argentina and Peru have adopted exceptions for smaller companies in relation to the need to – if this is the case – explain why they do not disclose sustainability information.