Environment social and governance – The importance of full disclosure

Full disclosure about environmental and labor practices by publicly traded companies is key, as are measures designed to avoid the disclosure of information that can be deemed misleading.

In Brazil, publicly traded companies must disclose every information that may affect the quotation of its stocks or other securities issued by the company, or the investor’s decision to buy, sell, hold or exercise rights related to a security or derivatives referenced in it. The information must be objective, true, complete and sufficient to be understood, as set forth in Resolution No. 44 of the Brazilian Securities Commission (CVM) and, according to judicial and administrative decisions about this issue, aligned with the international full disclosure principle.

Such public companies must also follow the international standards of accountability, known as International Financial Reporting Standards – IFRS, issued by the International Accounting Standards Board – IASB, as set forth by Brazilian corporate law and CVM regulation.

Despite the ongoing international debate about the metrics and methodologies to be adopted for disclosure issues and the complexity of related information, companies must abide by accounting and full disclosure rules already in force.

For example, the value expended by a company to reduce negative Environmental externalities of its supply chain must be kept separate from the value of provisions or cost relating to fines paid in relation to past violations of provisions of environmental legislation.

In the same manner, the value of provisions or costs of reimbursing consumers due to past malpractice should not be included in the budget dedicated to Social issues. And the cost of building internal controls as a result of a settlement agreement with a regulator should not be announced as a budget dedicated to Governance.

Translating to global language, non-compliance with the principles mentioned above could be considered, in order, as greenwashing, socialwashing and governance-washing, because these practices inflate the environment, social and governance commitments of the company and mislead investors about the real budget dedicated to those issues.

Due to the lack of specific regulation on disclosure, it may seem that companies can classify various costs or budget items as related to environmental, social and governance aspects, regardless of their source or destination, without this amounting to a legal infringement. But the examples above are contrary to the conceptual framework of IFRS, which differentiates the main elements of financial statements, thus being contrary to full disclosure standards as well.

The consequences of the disclosure of misleading information can be very severe and include civil and administrative liability, negative reputational effects among stakeholders and, in some cases, even criminal consequences, for example evidence of manipulation of information.

Given the relative novelty of environmental, social and governance disclosure, there are still no judicial or administrative precedents and trials about misleading information. However, the theories, arguments and judgements about non-compliance with full disclosure and accounting rules can be used as a source of interpretation on that matter.

On March 4, 2021, the Securities and Exchange Commission announced an enforcement taskforce to investigate and identify any material gaps or misstatements in issuer’s disclosure of climate risks and other environment credentials by public companies and asset managers.

In the European Union (EU), the Sustainable Finance Disclosure Regulation (SFDR) come into effect on March 10, 2021, as one of the three components of EU Sustainable Financial Action Plan, together with EU Taxonomy and EU Benchmark. SFRDR “lays down harmonized rules for financial market participants and financial advisers on transparency with regards to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products”. Based on SFDR, regulatory agencies across Europe have already set up supervisory and enforcement programs and they will affect public companies that disclose information to financial market participants and financial advisors.

In Brazil, CVM and Brazilian Central Bank also included the environmental, social and governance disclosure and risks as top issues for their rulemaking, supervision and enforcement programs.

Companies should submit their disclosure practice in the area for review by legal and accounting experts in order to avoid or mitigate the risks involved in misleading information. Compliance with full disclosure and accounting standards is the first step to put environmental, social and governance on track, help investors take informed decisions – and make sure that ESG does not amount to a buzzword only.

L&S Authors

Luiz Felipe Amaral Calabró

Luiz Felipe Amaral Calabró


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