The Brazilian Securities Commission (“CVM“) made an important announcement on October 20, 2023 with the introduction Rule No. 193 of CVM. This resolution provides comprehensive guidance for the preparation and dissemination of sustainability information reports, in particular IFRS S1 and IFRS S2, as set out 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 Sustainable Accounting Standards Board criteria (“SASB”).
About the IFRS S1 and IFRS S2
IFRS S1 focuses primarily on financial disclosures related to sustainability, while IFRS S2 focuses on climate-related information. Within both contexts, companies are mandated to provide extensive detail on four key dimensions:
- Management: explains the existing mechanisms for the allocation of responsibilities regarding environmental and socio-economic matters;
- Risk management: includes the methodologies for identifying, assessing and mitigating these inherent risks;
- Strategy: covers a broad spectrum of possibilities related to these factors; And
- Goals and statistics: explains which numerical objectives need to be achieved.
The IFRS S1 framework provides a more general view of sustainability, where the ISSB statements do not determine which specific indicators must be reported. In contrast, the IFRS S2 standard requires rigorous disclosure of greenhouse gas inventories, which include both direct emissions and those that are intertwined within the value chain. Furthermore, it mandates the disclosure of information on investments in climate-related projects and executive compensation related to climate-oriented objectives.
For more information about IFRS S1 and IFRS S2, you can read our previous blog post here.
The new rule and the Brazilian vanguard
This recently adopted CVM guideline represents the inaugural phase of CVM’s Sustainable Finance Action Plan for the period 2023-2024. This comprehensive strategy is supported by well-defined objectives and a strict compliance schedule, linked to the principles set out in the UN Convention CVM’s sustainable financing policy. What sets this regulation apart is its integration into the broader environmental transformation agenda introduced by the Ministry of Finance, as well as its alignment with the recent recommendations of the International Organization of Securities Commissions aimed at harmonizing sustainability data disclosure.
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, improving the quality of investment evaluations is increased both within national and international environments.
About CVM Rule No. 193
The preparation and distribution of sustainability-related financial information reports (the “Report“), which adhere to the ISSB standards, will only be mandatory for listed companies, and this requirement will become effective for fiscal years beginning on or after January 1, 2026. However, listed companies, securitization companies and investment funds that wish to To voluntarily adopt this reporting framework, preparations must begin for fiscal years beginning on or after January 1, 2024 (which means the standards will not apply to reporting 2023 data). In addition, the Federal Accounting Council (“CFC“) has indicated its intention to soon adopt a resolution making compliance with the ISSB standards mandatory for limited liability companies as well.
Furthermore, Rule No. 193 of the CVM provides, in terms of voluntary adoption, that (i) the initial preparation and disclosure of the report implies a commitment to continue this practice throughout all periods of voluntary adoption, and (ii) entities that opting for voluntary adoption can take advantage of the exemptions set forth in the ISSB standard until the first fiscal year of mandatory adoption (with the exception of presenting comparative information, which must be met beginning in the second fiscal year of standard adoption). To qualify for these exemptions, the entity must explicitly and unequivocally declare that it conforms to the ISSB standards.
The Report should be clearly identified and presented separately from the entity’s other information and financial statements. Their disclosure must at least correspond to the disclosure of the annual accounts at the end of the year. Therefore, disclosure must be made as follows: (i) for voluntary adoption and in the first fiscal year of mandatory adoption, on the same date as the filing of the “Reference Form”; and (ii) beginning with the second fiscal year of mandatory adoption, within three months after the end of the fiscal year or on the same date as the filing of the financial statements, whichever occurs first. In addition, the Report must be prepared on the basis of the consolidated entity reporting, and in the absence thereof on the basis of the individual entity.
In addition, CVM’s Rule No. 193 requires an independent auditor registered with CVM to conduct an assurance process in accordance with the CFC Standards for the Report. Limited assurance is required until the end of fiscal year 2025, while for fiscal years beginning on or after January 1, 2026, a more rigorous audit process known as reasonable assurance becomes necessary.
The global standardization of sustainability information brings with it a host of legal implications, including responsibilities to investors, civil liability and potential tax implications. Within this framework, a public consultation will take place on these ISSB standards, translated into Portuguese by the Brazilian Committee of Sustainability Declarations. This consultation aims to gather insights on the implications, barriers and benefits of embracing these standards. These insights will help make necessary adjustments in the convergence process, including mandatory adoption for listed companies.