This chapter presents the main practices and preferences of asset managers and companies in Latin America and selected jurisdictions, focusing on disclosure and assurance of sustainability information. Market participants in Latin America point out the need to make sustainability disclosure more reliable, consistent, and comparable.
Sustainability Policies and Practices for Corporate Governance in Latin America
Abstract
Investors and companies increasingly recognise sustainability‑related matters as a relevant source of risks and opportunities. Information on a company’s exposure to sustainability risks and how it manages them can be material for investors’ decisions to buy or sell securities. Therefore, access to material sustainability information is crucial for market efficiency and for the protection of investors.
As detailed in Chapter 7, some regulators have mandated or recommended the disclosure of sustainability matters. However, even in jurisdictions where sustainability disclosure is not mandatory, a significant number of companies have been reporting on sustainability risks and opportunities, driven by the interest from investors in the impact of environmental and social matters on companies’ financial performance. In Latin America, a majority of asset managers investing in the region, especially among the larger ones, review the sustainability disclosure of their portfolio companies (Figure 3.1).
From the companies’ perspective, out of the 42 000 listed companies globally, almost 8 000 disclosed a sustainability report or an integrated report that includes sustainability issues in 2021 (Figure 3.2). These companies represent 84% of the global market capitalisation. In Latin America, while not every country requires listed companies to disclose an annual sustainability report, 330 companies totalling 83% of the region’s market capitalisation disclose sustainability information.
Question: Do you review the sustainability or ESG disclosures of your portfolio companies?
Note: In the survey questionnaire, asset managers could answer or leave this question unanswered. The shares in this figure consider only the universe of asset managers that answered the question. On average, 90% of the asset managers responded within each size category.
Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.
Note: The “total” in “percentage of ‘Yes’ over the total” includes all listed companies within each category, including those for which there is no available information. For instance, in the case of the global category, the percentage is calculated over 42 019 worldwide listed companies, while in Latin America the percentage is calculated over 1 252 companies.
Source: OECD Corporate Sustainability dataset, Refinitiv, Bloomberg. See Annex B for details.
Globally, companies representing at least 75% of the total market capitalisation in each industry disclosed sustainability information in 2021. This share is the largest among extractives and minerals processing companies, and food and beverage companies, in which 90% and 88% by market capitalisation disclosed sustainability information, respectively. In Latin America, while 61% of the services industry and 66% of the transportation industry disclosed sustainability information, 89% of the extractives and minerals processing companies disclosed sustainability information in 2021 (Figure 3.3).
Note: The figure displays the share of companies by market capitalisation that reported sustainability information against all companies in each industry. For instance, out of the 118 consumer goods companies in Latin America with a total market capitalisation of USD 159 billion, 28 consumer goods companies with USD 138 billion of market capitalisation report sustainability information, accounting for 87% of the total market capitalisation of the industry.
Source: OECD Corporate Sustainability dataset, Refinitiv, Bloomberg. See Annex B for details.
While the number of companies reporting sustainability information is relatively high at present, the assurance of disclosed information by an independent third party is considerably less frequent. This may reduce the confidence investors might have in the disclosed information and the possibility of comparing reports between companies. Although companies representing 84% of the world’s market capitalisation disclose sustainability reports, an external service provider assures only the sustainability disclosure of companies representing 51% of market capitalisation (Figure 3.4). Among Latin American companies, 60% by market capitalisation hired a third party to conduct an external assessment of the report. Colombia (84%), Mexico (64%) and Brazil (64%) were above the regional average, while Chile (51%), Argentina (29%) and Peru (25%) were below it.
Note: The "total" in "percentage of 'Yes' over the total" includes all listed companies within each category, including those for which there is no available information. For instance, in the case of the global category, the percentage is calculated over 42 019 worldwide listed companies, while in Latin America the percentage is calculated over 1 252 companies. In the 357 cases globally where there was a discrepancy between Refinitiv and Bloomberg databases (“Yes” in one and “No” in the other one), it was considered that the company did not provide assurance of its sustainability report.
Source: OECD Corporate Sustainability dataset, Refinitiv, Bloomberg. See Annex B for details.
While half of the companies by market capitalisation reported to issue their sustainability reports with the assurance of an external provider, 64% of those were assured by an auditor (Figure 3.5). In the United States, the assured sustainability reports were performed in 38% of the companies by auditors and 62% by non‑auditors. In China and the European Union, almost all assured reports were performed by an auditor. Likewise, in Latin America, 93% of the sustainability reports were assured by an auditor, although in Peru they only account for 13%.
Note: Out of the 2 684 companies that reported the assurance of their sustainability report of an independent third party, 1 507 disclosed the name of the independent third party. The independent third party was classified as an auditor if the third party audited the financial statement of any of the 42 019 companies comprising the sample globally.
Source: OECD Corporate Sustainability dataset, Refinitiv, Bloomberg. See Annex B for details.
The analysis of a target sample composed of all sustainability reports from the 143 largest companies by market capitalisation included in the stock market indices of Argentina, Brazil, Chile, Colombia, Mexico, Peru, the United Kingdom, and the United States shows that in 46% of the sustainability reports the level of assurance was “limited” according to the taxonomy defined by the ISAE 3000 (Figure 3.6). In the United Kingdom, limited assurance was provided for 74% of the reports, followed by 64% in Mexico and 57% in Argentina. In Colombia, Brazil, and the United States, this share amounted to an average of 40%. In Chile and Peru, limited assurance was provided for 33% and 11% of the sustainability reports, respectively. In contrast, reasonable assurance engagement of the sustainability report is rare, with only 4% on average among the analysed sample (“reasonable” is the level required, as a rule, from the external auditing of financial reports). The analysis did not identify any reasonable assurance of sustainability reports in Argentina, Brazil, Chile, and Peru.
Question: What is the level of the assurance engagement of the sustainability report?
Note: The difference between 100% and the sum of limited plus reasonable assurances is either due to the technical limitations of an NPL analysis or because the assurance provider did not adopt ISAE 3000, which defines the taxonomy of “limited” and “reasonable” assurance (for instance, 27% of Mexican companies included in the sample).
Source: NPL analysis developed by Miklos Vasarhelyi, Ricardo Lopes Cardoso and their teams affiliated to, respectively, Rutgers University (United States) and Getulio Vargas Foundation (Brazil).
In Argentina, Brazil, Costa Rica, Mexico and Peru, asset managers and listed companies support mandatory regulation requiring listed companies to disclose an annual sustainability report with ESG information that is financially material1. There is such support among 89% of the large‑sized asset managers, 84% of the medium‑sized ones and 76% of the small‑sized asset managers (Figure 3.7). The same holds true for the listed companies, with 92% of companies in the large‑cap indexes and 86% of the remaining companies supporting mandatory sustainability disclosure (Figure 3.8).
Question: Would you support a mandatory regulation requiring all listed companies in the country of your headquarters to disclose an annual sustainability report with ESG information that is financially material for them?
Note: In the survey questionnaire, this question was only presented if the respondent previously answered "no" or left the question about the existence of a mandatory regulation in their headquarters unanswered. Furthermore, asset managers could answer "yes" or "no" or leave it unanswered. The shares in this figure consider only the universe of asset managers that answered either "yes" or "no" (excluding asset managers in Chile and Colombia). On average, 87% of the asset managers responded within each size category.
Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.
Question: Would you support a regulation obliging all listed companies in your country to disclose an annual sustainability report with ESG information that is financially material for them?
Note: In the survey questionnaire, this question was only presented if the respondent previously answered "no" or left the question about the existence of a mandatory regulation in their headquarters unanswered. Furthermore, companies could answer "yes" or "no" or leave it unanswered. The shares in this figure consider only the universe of listed companies that answered either "yes" or "no" (excluding companies listed in Chile and Colombia). On average, 70% of the companies responded within each category.
Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.
Companies have been using different accounting standards and frameworks to disclose sustainability information2. Globally, the CDP’s questionnaires are used by 2 891 companies representing 55% of the total market capitalisation, the GRI Standards follow with a disclosure by 3 247 companies accounting for 45% of the market capitalisation. TCFD’s recommendations are used by 2 639 companies that total 44% of the market capitalisation and SASB Standards are followed by 1 572 companies that sum up 38% of market capitalisation. Nevertheless, preferences vary across jurisdictions.
In the United Kingdom and Japan, almost 300 companies (70% of market capitalisation) and 441 (51% of market capitalisation), respectively, followed fully or partially TCFD’s recommendations. In the United States, 600 companies (55% of market capitalisation) used SASB Standards to disclose sustainability information. In the European Union (746 companies, 70% of market capitalisation), China (258 companies, 37% of market capitalisation), Latin America (223 companies, 71% of market capitalisation) indicated a use of GRI Standards for guidance in their public reporting (Figure 3.9).
Note: The “total” in “percentage of ‘Yes’ over the total” includes all listed companies within each category, including those for which there is no available information. For instance, in the case of the global category, the percentage is calculated over 42 019 worldwide listed companies, while in Latin America the percentage is calculated over 1 252 companies. The sustainability disclosure can be either partially or fully compliant with a reporting standard (“Yes” refers both to full and partial compliance). Likewise, a single company can report compliance with one or more reporting standards. The category “Others” contains all companies that disclosed sustainability information (see Figure 3.2) but that did not report compliance with any specific reporting standard among the four highlighted in the figure.
Source: OECD Corporate Sustainability dataset, Refinitiv, Bloomberg. See Annex B for details.
Respondents to the OECD survey on sustainability practices of listed companies in Latin America corroborated the observed trends in Figure 3.9, where 97% of the companies in large indexes reported to be fully or partially aligned with GRI Standards, followed by SASB Standards (73%), Integrated Reporting Framework (55%), and TCFD’s recommendations (53%) (Figure 3.10).
Question: Is your company’s annual sustainability report aligned with which ESG reporting frameworks?
Note: Some sustainability reports followed more than one ESG reporting standard, and this is the reason why the aggregate percentages in each figure do not add up to 100%.
Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.
A survey conducted with 42 global institutional investors (with some overrepresentation of UK‑based investors in the sample) managing approximately USD 29 trillion in assets under management (with two‑thirds of their portfolio in equity) shows that they have clear preferences for some sustainability standards. Three‑quarters of all surveyed investors indicated the TCFD’s recommendations as their preferred sustainability reporting framework, followed by SASB Standards (53%) and then in‑house proprietary frameworks (39%) (Morrow Sodali, 2021, p. 17[12]). For asset managers investing in Latin America, preferences are less clear, with a relatively higher preference for GRI Standards (19%) and SASB Standards (17%) in the case of large‑sized asset managers and in‑house proprietary frameworks for medium and small sized ones (Figure 3.11).
Question: What is your first preferred ESG framework for companies to best disclose their ESG and sustainability topics?
Note: In the survey questionnaire, asset managers can select their preferred ESG reporting standard. The shares in this figure consider only the universe of asset managers that provided their preferences.
Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.
As illustrated in Figure 3.9 and Figure 3.10, the freedom to choose has led listed companies to adopt different sustainability reporting standards. This freedom creates challenges and raises questions about consistent and comparable sustainability performance for investors and other stakeholders (including across time and between companies within the same sector) (Pucker, 2021[13]). The lack of consistency and comparability reduces market participants' reliability and usefulness of sustainability‑related disclosure. It limits investors' ability to assess each company’s value, decide how to allocate their funds, and engage with them.
Question: Would you support the adoption of an ESG reporting standard for listed companies in the country of your headquarters that either voluntarily or compulsorily disclose an annual sustainability report?
Note: In the survey questionnaire, this question was only presented if the respondent previously answered "no" or leave the question about the existence of a reporting standard for listed companies in their headquarters unanswered. Asset managers could answer "yes" or "no" or leave it unanswered. The shares in this figure consider only the universe of asset managers that answered either "yes" or "no" (excluding asset managers in Chile and Colombia). On average, 82% of the asset managers responded within each size category.
Source: OECD Survey on Sustainability Practices of Asset Managers in Latin America.
Question: Would you support the adoption of an ESG reporting standard for listed companies in your country that either voluntarily or compulsorily disclose an annual sustainability report?
Note: In the survey questionnaire, this question was only presented if the respondent previously answered "no" or leave the question about the existence of a reporting standard for listed companies in their headquarters unanswered. Furthermore, companies could answer "yes" or "no" or leave it unanswered. The shares in this figure consider only the universe of listed companies that answered either "yes" or "no" (excluding companies listed in Chile and Colombia). On average, 63% of the companies responded within each category.
Source: OECD Survey on Sustainability Practices of Listed Companies in Latin America.
A 2021 survey with investors representing 325 investment professionals across 43 countries who represent a combined AUM of more than USD 14 trillion found that investors are making a clear call for comparability, standardisation, and consistency in reporting. Seventy‑four percent of them agreed with the statement that "my investment decision‑making would be better informed if companies applied a single set of ESG reporting standards" (PwC, 2021, p. 5[14]). Only Colombia mandates the use of a common international sustainability reporting standard among the seven surveyed Latin American countries (Table 7.2). Still, as presented in Figure 3.12 and Figure 3.13 above, there is a strong support for adopting a common international sustainability reporting standard for listed companies among asset managers and companies in other countries in the region.