Brazil: Brazil Sets Global Precedent: First Nation To Embrace ISSB Sustainability Financial Reports

The Brazilian Securities Commission ("CVM") made a significant announcement on October 20, 2023, by introducing CVM's Rule No. 193. This resolution provides comprehensive guidance on the creation and dissemination of sustainability information reports, specifically the IFRS S1 and IFRS S2, as outlined by the International Sustainability Standards Board ("ISSB"), which are aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures ("TCFD") and the criteria set by the Sustainable Accounting Standards Board ("SASB").

About the IFRS S1 and IFRS S2

The IFRS S1 primarily focuses on financial disclosures pertaining to sustainability, while IFRS S2 delves into climate-related information. Within both contexts, corporations are mandated to furnish comprehensive details on four key dimensions:

• Governance: explains the mechanisms in place for the allocation of responsibilities concerning environmental and socio-economic matters;
• Risk management: encompasses the methodologies for identifying, assessing, and mitigating these inherent risks;
• Strategy: encompasses a wide spectrum of opportunities linked to these factors; and
• Goals and metrics: explains the numerical targets to be achieved.

The IFRS S1 framework offers a more generalized view of sustainability, with the ISSB pronouncements refraining from stipulating the specific indicators to be reported. In contrast, the IFRS S2 standard requires meticulous disclosure regarding greenhouse gas inventories, encompassing both direct emissions and those intertwined within the value chain. Furthermore, it imposes the disclosure of information concerning investments in climate-related projects and executive compensation tied to climate-focused objectives.

For further information about the IFRS S1 and IFRS S2, read our earlier blog post here.

The new Rule and the Brazilian vanguard

This recently enacted CVM directive represents the inaugural phase of CVM's Sustainable Finance Action Plan for the 2023-2024 period. This comprehensive strategy is underpinned by well-defined objectives and a stringent adherence schedule, linked with the principles established in CVM's Sustainable Finance Policy. What distinguishes this regulation is its integration into the broader environmental transformation agenda introduced by the Ministry of Finance, as well as its alignment with the recent recommendations put forth by the International Organization of Securities Commissions, aimed at harmonizing the disclosure of sustainability data.

This move – which makes Brazil the first country to formally commit to the adoption of IFRS S1 and IFRS S2 – not only supports the globalization of these standards but also promises substantial benefits for analysts conducting comparative assessments, elevating the quality of investment evaluations, both within national and international environments.

About the CVM Rule No. 193

The preparation and dissemination of sustainability-related financial information reports (the "Report"), adhering to the ISSB standards, will be mandatory only for publicly traded companies, and this requirement will take effect for fiscal years commencing on or after January 1, 2026. However, publicly traded companies, securitization firms, and investment funds that wish to voluntarily adopt this reporting framework should commence preparations for fiscal years starting on or after January 1, 2024 (meaning that the standards will not apply to reporting 2023 data). In addition, the Federal Accounting Council ("CFC") has indicated its intention to soon approve a resolution mandating compliance with the ISSB standards for limited liability companies as well.

Additionally, in terms of voluntary adoption, CVM's Rule No. 193 stipulates that (i) the initial preparation and disclosure of the Report implies a commitment to continue this practice during all periods of voluntary adoption, and (ii) entities that opt for voluntary adoption can take advantage of the reliefs outlined in the ISSB's standard up until the first fiscal year of mandatory adoption (with the exception of presenting comparative information, which must be adhered to from the second fiscal year of standard adoption). To be qualified for these reliefs the entity must explicitly and unambiguously declare its alignment with the standards issued by the ISSB.

The Report must be distinctly identified and presented separately from the entity's other information and financial statements. Its disclosure must, at the very least, match the disclosure of year-end financial statements. Therefore, the disclosure should be made as follows: (i) for voluntary adoption and in the first mandatory adoption fiscal year, on the same date as the submission of the "Reference Form"; and (ii) from the second mandatory adoption fiscal year, within three months of the fiscal year-end or on the same date as the submission of financial statements, whichever occurs first. Furthermore, the Report must be prepared based on the consolidated entity reporting, and in its absence, based on the individual entity.

Moreover, CVM's Rule No. 193 mandates that an independent auditor registered with CVM conducts an assurance process in accordance with CFC standards for the Report. Until the end of the 2025 fiscal year, limited assurance is mandated, while from fiscal years commencing on or after January 1, 2026, a more rigorous auditing process, known as reasonable assurance, becomes necessary.

What's next?

The global standardization of sustainability information brings forth a multitude of legal ramifications, encompassing responsibilities towards investors, civil liabilities, and potential tax implications. Within this framework, there will be a public consultation on these ISSB standards, translated into Portuguese by the Brazilian Committee of Sustainability Pronouncements. This consultation seeks to collect insights on repercussions, obstacles, and advantages of embracing these standards. These insights will aid in making necessary adjustments in the convergence process, including the mandatory adoption for publicly held companies.

Visit us at Tauil & Chequer