Fiduciary Duty in the 21st Century: Responsible Investing in Brazil

In Brazil, two distinct drivers have underpinned recent government and investor action on responsible investment. The first has been the high profile “Lava Jato” scandals and the Mariana dam tragedy. Both were seen as failings of corporate management and ethics, and investors have been challenged about their response to these events. The second has been the need to encourage private sector investment in Brazil’s low carbon energy transition. This is of particular importance given the Brazil government’s commitment to reduce its carbon emissions by 37% by 2025 (compared to 2005).

These recent developments follow a decade-long interest in responsible investment. For example:

• In 2005, B3, the Brazilian Stock Exchange created the Corporate Sustainability Index, which allows stakeholders to compare listed companies’ sustainability performance.

• In 2009, Resolution 3.792, issued by the National Monetary Council, requires occupational pension funds to adopt high ethical standards when making investments. The resolution also required occupational pension funds to take account of environmental and social issues in their investment practices. PREVIC, the pension regulator, requires funds to explicitly state in their annual statements whether they comply with Resolution 3.792.

• In 2014, Resolution 4.327, issued by the National Monetary Council, requires financial institutions regulated by the Central Bank to adopt social and environmental policies.

• And in 2016, ANBIMA, the Brazilian Financial and Capital Markets Association, issued the Code of Regulation and Best Practices for Investment Funds, which encourages investor engagement on corporate governance.

However, the regulatory framework for responsible investment remains incomplete.For example, while resolution 3.792 is welcome, asset owners and investment managers tend to consider ESG as “optional”, the regulation is not well monitored and disconnected from the government’s wider sustainability objectives. This has led to confusion in how investors interpret their fiduciary duties, with some Brazilian investors still considering ESG issues out of their range.

The launch of the report Fiduciary Duty in the 21st Century in 2015, followed by the Brazil Roadmap in 2016, has helped contribute to an understanding of fiduciary duty that requires the consideration of ESG factors. The Roadmap made recommendations directed at improving responsible investment practices and ESG integration, including:

• Resolution 3.792 should be revised to clarify that the consideration of material ESG factors are part of the primary analysis of a prudent investment process.

• Requirements to analyse ESG issues in the insurance and open pension plan markets should be added to the investment policy guidelines issued by the National Monetary Council (CMN) with the collaboration of the National Superintendence of Private Insurance (SUSEP), which supervises these industries.

• The impact of Resolution 4.327 on investment practices and processes should be monitored on an ongoing basis.

• The stewardship code created by AMEC, the Brazilian Association of Capital Market Investors, should be widely adopted.

• Regulators, industry associations and accreditation agencies should collaborate on raising ESG awareness by improving disclosure practices, providing practical training and promoting stewardship adoption.

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Since the release of the Brazil Roadmap, UNEP FI and the PRI have engaged extensively with regulators, the investment industry and other stakeholders to help clarify the regulatory framework. A revision to Resolution 3.792 has already been approved by PREVIC’s Board of Directors and has just been submitted to consultation. The expected changes should improve the enforcement of the requirement for pension funds to state whether they consider environmental, social and governance factors. PREVIC’s Guide for Best Practices on Investments is also expected to be revised to reinforce the importance of ESG issues.

SUSEP, the insurance regulator, has started to follow PREVIC’s lead. In April 2018, SUSEP published its 2018 Regulation Plan, which includes a proposal to revise Resolution CNSP 321 to incorporate ESG issues.

Finally, CVM, the securities regulator, has worked with the Instituto Brasileiro de Governança Corporativa to develop a code for corporate governance. The code governs the reporting procedures for listed companies and securities issuances, including the disclosure of social and environmental risks.The hybrid of regulation and self-regulation is seen by policy makers as a model for future policy developments.

Brazil has a proud tradition of responsible investment. PREVI, the country’s largest occupational pension fund, was the first PRI signatory in Latin America, and has been a long-standing and active PRI board member. But if Brazil is to maintain that tradition, policy makers need to implement the recommendations set out in the Roadmap, to remove any lasting ambiguity about ESG issues and fiduciary duties.

Marcelo Seraphim is a Senior Policy Consultant to the Fiduciary Duty in the 21st Century Programme as part of the United Nations Environment Programme Finance Initiative (UNEP FI). The Fiduciary Duty in the 21st Century Programme is a collaboration between the Principles for Responsible Investment, the Generation Foundation and UNEP FI.