Climate change and the growing concern of companies to foster sustainable practices and increasingly solid governance lead the financial and capital markets around the world to dedicate more and more attention to analysis and incorporation of ESG (environmental, social, and governance) aspects in risk assessment processes and/or investment opportunities.

The scenario is no different in Brazil. The Brazilian Association of Financial and Capital Markets Entities (Anbima), a self-regulatory entity and a spokesperson for the market, shows increasing concern with the topic, especially when applied to investment funds and their asset managers.

The first initiative in this direction is from January of 2020, when Anbima published the ESG Guide | Incorporation of ESG aspects in investment analysis. The publication governs ESG concepts and national and global performance indicators, outlined the panorama of the Brazilian and world industry, besides presenting recommendations of essential requirements to be observed in investment policies implemented by managers.

In this scenario, to prepare the ESG policy, Anbima recommends that managers observe, at least, the aspects below:

  • The asset manager that wants to implement ESG aspects in its investment analysis must disclose, clearly and objectively, how the criteria are incorporated into the investment policy, containing the rules, procedures, and controls for the implementation and maintenance of this type of investment. It is recommended that the document contain at least the following information:
  • list of funds that adhere to the ESG policy;
  • total ESG assets under management;
  • employees responsible for ESG analysis and management, as well as assignment of responsibilities;
  • ESG factors that are considered relevant and are the focus of investments;
  • indicators used to assess ESG issues;
  • procedures adopted for the acquisition and monitoring of ESG assets;
  • the governance adopted and procedures implemented, including the voting policy and the criteria for divestment of assets that do not meet the requirements of the ESG investment policy; and
  • frequency of review of the manager's investment policy.
  • Without prejudice to its responsibility, the asset manager may hire third parties to help in the evaluation or in the monitoring of the ESG issues of the assets under management.
  • Also without prejudice to its responsibility, the asset manager may also set up a committee or body that is responsible for approving the acquisitions and monitoring of ESG assets for the investment funds under its management. In the event it is set up, the following is recommended:
  • establish reporting, including hierarchy and authority;
  • define the frequency with which the meetings will be held;
  • document the decisions and resolutions passed; and
  • file the documents on which the decisions were based.
  • It is recommended that the institution responsible for implementing the ESG policy publish the document on its website and keep it updated, stating the effective date and the date of the last revision. In any case, the ESG policy should be reviewed periodically and, whenever the conditions, environment, and assumptions on which it is based change significantly and materially, its content should be readjusted.

Anbima recognized, however, that the investment strategies widespread in the market show that there is no specific pattern. Thus, the information listed in this first guide should serve only as a guideline. It is up to the manager to adapt them to its needs.

Rules for fixed income and equity funds published in January of 2022

On January 3 of this year, the self-regulatory body turned its attention to the investment fund industry specifically and issued the Rules and Procedures for Identifying Sustainable Investment Funds (SI) manual. The document establishes rules, criteria, and procedures to be mandatorily observed only by fixed income and equity funds, and their respective managers, that opt to:

  • identify their funds as sustainable investment funds in Anbima's database (those that have sustainable investment as an objective); or
  • disclose in publicity materials that the so-called "ESG Issues" are considered in their investment policies in achieving their various objectives (e.g. for better identification of risks in asset analysis).

The manual's determinations are effective as of the date of its publication and must be implemented by the participating institutions within 180 days.

In February of this year, Anbima published the ESG II Guide | ESG Aspects for Investment Fund Managers and for Investment Funds, with the double function of supplementing the first guide (with updated information on the market panorama and international references on the matter) and helping investment funds, from the equity and fixed income classes (at this first moment), identified or that intend to identify themselves as sustainable investment funds (and their respective managers) to interpret and comply with the determinations found within the rulebook.

The ESG II Guide emphasized that the manager's responsibility is given to the extent that the choice to work with sustainable products, or products that consider ESG issues, involves a process incorporated into management, unlike other types of funds whose characteristics are determined mainly by the asset classes that make up their portfolios. These criteria, however, are not related to the managers' (as companies) internal sustainability policies, but rather to their policies, procedures, and structure aimed at incorporating ESG factors into their investment analysis and management processes.

Anbima's second ESG guide also brings in specific rules applicable to the asset manager, such as the obligation to prepare and maintain on its website a document containing guidelines, rules, procedures, criteria, and controls that will be adopted by the institution (or, alternatively, by the entire conglomerate or economic group) on the integration of ESG and/or sustainable investment issues.

In addition to the criteria to be applied to the manager, the designation of a fund as sustainable (SI) depends on a set of requirements explained in the rulebook (to be checked with the fund itself), as detailed below:

  • Regarding the fund's commitment to sustainable investment:
  • include in its name the suffix “SI" (sustainable investment);
  • make explicit in its bylaws a summary of the fund's sustainable investment objective; and
  • demonstrate the alignment of the portfolio to the SI fund's sustainable investment objective and that the remaining or temporary investments "do no harm" to that purpose.

It is important to emphasize that Anbima has not determined prescriptive criteria, such as minimum percentages of composition or indication of acceptable methodology, because it understands that various combinations of portfolio and management can produce similar results in achieving a sustainable investment objective. In any case, the manager should establish parameters for assessing portfolio alignment and potential damage to the IS Fund's objective.

  • Regarding the continued actions taken:
  • adopt and disclose an investment strategy that includes, at a minimum: the methodology used to achieve the sustainable investment objective(s) of the SI fund; the reference source(s) of information used in accordance with that methodology and the manner in which it is processed; and other tools employed that complement or support that strategy;
  • identify possible limitations in the methodologies used with a view to the SI fund's objectives, including those related to data processing and the tools used;
  • adopt and disclose due diligence actions to ensure the investment objective(s) of the SI fund in relation to the constraints identified (e.g., the manager can explain how it protects itself against potentially damaging, or unaudited, information, and should disclose how it ensures conflict management in hiring ESG rating agencies, which may also provide advisory services to the companies or funds it targets for assessment);
  • present what material actions, metrics, and/or indicators are used to monitor the SI fund's investment objective(s);
  • adopt and disclose systematic engagement processes with the issuers of the assets comprising the portfolio on relevant issues, in order to achieve the SI fund's objective(s); depending on the strategy chosen, the manager may be required to play a prominent role as a driver of best social and environmental practices and governance in the investee companies (engagement that can be practiced by both equity investors and debt security holders); and
  • if the asset manager has voting power in an investee's decision-making body, follow the "Rules and Procedures for Exercising Voting Rights at Meetings No. 02", of May 23, 2019, and adopt voting practices that are in harmony with the SI fund's objective(s) (proxy voting), remembering that Anbima's Third Party Asset Management Code has rules in this regard.
  • In any case, the indicators and/or metrics defined for the purpose of verifying the performance of the SI fund regarding its sustainability objective, the limitations of its methodology, and/or the data used, and the verification of the "do no harm" principle on the allocation of resources of the portfolio must be registered and monitored over time.
  • Disclose, in a clear, objective, and up-to-date manner, in the SI fund's advertising material, its sustainable investment objective(s), and the strategies and actions used to pursue and monitor that objective(s) to provide transparency to the investor.
  • Ensure, if an index is used as a reference, that it is also aligned with the sustainable investment objective(s) of the SI fund. The manager may replicate indexes that incorporate sustainability criteria, refine an existing indicator, build a proprietary index, or actively engage with the companies in the index around sustainability issues. The methodology of the indicator or the one adopted must be formalized, and the performance of the index in relation to the fund's objective must be monitored, as well as the limitations previously identified.
  • Have a resource manager that complies with the rules of the manual. The sustainable investment objectives of the SI manager and the SI fund, as well as the strategies and actions used to pursue and monitor this purpose, should be reported in a clear, objective, and up-to-date manner in the SI fund's documents.

Although the manual of Rules and Procedures for the Identification of Sustainable Investment Funds (SI) is intended only for fixed income and equity funds, it is possible that similar criteria will be published and applied by Anbima for other types of funds, such as multimarket and structured funds (equity investment funds - FIPs, credit rights investment funds - FIDCs, and real estate investment funds - FIIs), helping the segment and investors to advance in this agenda.