This report presents an overview of the main trends and issues related to sustainability policies and practices for corporate governance, both in Brazil and globally. It serves to support the development of Brazil’s regulatory framework for sustainability disclosure, the responsibilities of company boards and shareholder rights. The report presents the results of two OECD surveys conducted with 63 Brazilian companies comprising around half of the country’s stock market capitalisation and 363 asset managers investing more than USD 1 trillion in the country.

Brazil’s capital market landscape. Brazil’s public equity market had 190 new listings and 542 delistings from 2000 to 2020. Net listings were only positive in 2007 and in 2020. Total market capitalisation represented 68% of GDP at the end of 2020, which was lower than in the United States (194%), the United Kingdom (149%) and India (98%), but higher than in Mexico (37%).

Private corporations were the most important category of equity owners in Brazil with 29% of market at the end of 2020. They were followed by institutional investors (27%), the public sector (10%) and strategic individuals (8%). Foreign investors managed 65% of the equity owned by institutional investors. The average combined holdings of the top three shareholders in Brazil represents 57% of a company’s equity, which is similar to the ownership concentration in France, India and Mexico, but considerably higher than in the United Kingdom (36%) and in the United States (33%).

Brazilian companies raised a total of USD 864 billion in bonds from 2000 to 2021, with 60% of this amount issued by non-financial companies. There were 35 issuers of green bonds in Brazil in the same period, among which 23 are either listed or subsidiaries of listed companies. Green bond issuance, however, totalled only USD 8.2 billion, close to the amounts issued in India and Mexico but considerably smaller than in other markets (e.g. USD 64.4 billion in the United Kingdom).

Corporate disclosure. A majority of asset managers investing in Brazil review the sustainability disclosure of the companies in their portfolios. For large asset managers, 59% report that they review the sustainability disclosure from all investee companies and 29% that they do so only for certain industries. Every year, Brazilian public companies must either disclose a sustainability report or explain why they do not disclose one. The companies that disclose a sustainability report may choose to use any existing sustainability accounting standard.

To date, a number of reporting standards have been developed for companies to disclose sustainability information but these standards vary with respect to their target audiences, the issues they cover and the threshold they recommend for information to be disclosed. In Brazil, the GRI Standards are the most-often used sustainability standards, but other frameworks, such as the SASB Standards, are also used by many public companies. This multitude of existing standards, however, raises questions related to the comparability of sustainability information disclosed by companies. This is probably the reason why a majority of asset managers investing in Brazil and public companies in the country would support the adoption of an international sustainability reporting standard for listed companies (71% support from large asset managers and 76% from large companies).

The use of multiple sustainability reporting standards is not the only barrier to greater consistency and comparability of corporate sustainability disclosure. When the sustainability information disclosed is not assured by a third party based on robust methodologies, confidence in the information can be undermined. In Brazil, 76% of large listed companies that disclose sustainability information provide some level of assurance by a third party, but this is much lower for smaller companies (25%).

The responsibility of boards. While business reality is complex, corporate law generally presents a simplified definition of directors’ duties, including the duties of care and loyalty, in order to make them functional. Jurisdictions vary in relation to who is effectively the recipient of directors’ duty of loyalty between the following two extremes:

• At one end of the spectrum, company law may fully adhere to the “shareholder primacy” view, obliging directors to consider only shareholders’ financial interests while complying with the applicable law and ethical standards.

• At the other end of the spectrum, directors are required to balance shareholders’ financial interests with the best interests of stakeholders, and, in addition, to fulfil a number of public interest goals.

Brazil’s company law adopts a model that may be situated between those two extremes. Independent of these considerations, a large majority of boards of directors in Brazil considered sustainability matters in 2021 (human capital and data security were the top priorities). Companies for who climate change is a financially material risk represented 70% of market capitalisation in Brazil in 2021 – 5 percentage points above the global average. Executive compensation plans were linked to sustainability performance metrics in 79% of large public companies and in 21% of the smaller companies in 2021.

Shareholders rights and engagement. Shareholders commonly use three main fora to compel companies to incorporate sustainability-related considerations into their business decision-making processes: direct dialogue with directors and key executives, shareholder meetings and courts. A large majority of asset managers investing in Brazil consider sustainability risks and opportunities when voting in a shareholder meeting or engaging with directors (e.g. 82% of large asset managers when in dialogue with directors and executives). Interestingly, a majority of asset managers declared to be willing to accept a lower rate of return in a company in exchange for societal or environmental benefits. From 2019 to 2021, at least 33 sustainability-related shareholder resolutions were voted in a shareholder meeting in Brazil. Human capital, climate change, biodiversity and data security were the most frequent sustainability matters considered in these resolutions.

While litigation involving shareholder rights is uncommon in Brazil, the rupture of a Vale tailings dam in the city of Brumadinho in 2019 has given rise to six arbitrations before the arbitration chamber of the local stock exchange by (i) 385 minority shareholders, (ii) a class association of minority shareholders and (iii) foreign investment funds. Brazil’s Securities and Exchange Commission has also initiated an administrative proceeding to assess Vale’s key executives’ fulfilment of their duty of care in events related to the rupture of the dam in Brumadinho, and the indictment has yet to be evaluated by the Commissioners.