Environmental, Social, and Governance (ESG) Integration in Brazil

CFA Institute and Principles for Responsible Investment (PRI) recently released two new reports to help investors better understand how to integrate ESG data into the investment process — ESG Integration in the Americas: Markets, Practices, and Data, and Guidance and Case Studies for ESG Integration: Equities and Fixed Income. These reports were the result of a series of surveys, global workshops with CFA Institute members and other global financial professionals, and ESG research conducted by CFA and PRI.

Below, we highlight our findings about the current state of ESG integration in Brazil, to complement our findings in the United States and Canada.

In Brazil, the primary focus of investors is corporate governance; investors are just beginning to incorporate environmental and social data into the investment process. The focus on corporate governance is reinforced by the Novo Mercado (“New Market”) section of the Brazilian stock exchange introduced more than a decade ago. The Novo Mercado requires higher corporate governance standards for companies that wish to be listed within it. It is not surprising, therefore, that most practitioners noted that integrating governance into the investment process is understood to be best practice. Although governance is well integrated into both equity and fixed income in Brazil, workshop participants reported that environmental factors are only sometimes factored in equity, and not often considered in fixed income.

ESG integration in Brazil is in its early stages. ESG teams at investment firms are small if they are present at all. Much of the demand for ESG integration comes from investors outside Brazil and from global institutional investors who are integrating ESG into their own investment process in their home markets. The demand for ESG integration from institutional investors in Brazil is low at this time. However, because ESG analysis represents a culture change in analysis, the demand for it is expected to increaseslowly over time.

The data and workshops also revealed that ESG integration is largely seen as synonymous with Socially Responsible Investing (SRI). The few products on offer to investors in Brazil are SRI products. SRI is typically associated with negative and positive screening, while true ESG integration simply incorporates an analysis of all material ESG factors into fundamental analysis. Respondents were in consensus that a great deal of education about the benefits of ESG integration for both investors and clients is needed.

The main takeaways from our workshop in Brazil and discussions with Brazilian investors are as follows:

1. Governance issues are systematically integrated into investor processes. However, survey responses suggest that over the next five years, by 2022, environmental and social issues will become significantly closer in importance to governance issues.
2. ESG integration practices in Brazil are carried out predominantly in equities. However, a few fixed-income practitioners are deploying advanced ESG integration practices.
3. Compared with those in other countries, ESG company disclosures in Brazil are very high for all sectors. However, workshop participants expressed concerns around data quality and greenwashing by firms.

Image Credit: © Shana Novak