ESG Newsletter No. 01

Check out our ESG Newsletter, which gathers information on recent legislation, news, public consultations and bills relating to the environmental, social and governance aspects in various sectors.

For more information, please contact our lawyers.

Enjoy reading!

Demarest ESG Practice Group

Law requires companies with 100 or more employees to disclose transparency reports on equal pay and remuneration criteria for men and women

Law No. 14,611/2023 introduces new measures aimed at fostering equal pay and remuneration criteria for women and men.

Such measures must be adopted by private companies and the Brazilian Federal Government, including transparency reports and increased monitoring regarding this topic.

Although there has been no change in the elements that characterize the right to equal pay – which were already applicable to cases of wage disparity between men and women –, the new law has introduced important new features, including:

• New penalties for violation of equal pay (Art. 461 of the Labor Code):
  • The payment of salary differences arising from claims of equal pay does not preclude compensation for pain and suffering in the event of discrimination;
  • The administrative penalty for non-compliance with equal pay on a discriminatory basis increased ten-fold as compared to the new wage due to the discriminated employee, which will be applied twice in the event of recurrence.
• Measures to ensure equal pay for men and women:

• • establishing wage transparency mechanisms and remuneration criteria;
  • increasing the monitoring against wage discrimination and remuneration criteria between women and men;
  • providing specific channels for wage discrimination complaints;
  • fostering and implementing diversity and inclusion programs in the work environment encompassing the training of managers, leaders and employees on the topic of equality between men and women in the labor market, with assessment of results; and
  • fomenting women training programs for joining, continuing and growing in the labor market, on equal terms with men. 
• Half-yearly wage transparency reports:
  The main innovation introduced by the new law is the obligation, for companies with 100 or more employees, to publish half-yearly reports on wage transparency and remuneration criteria, in accordance with the regulations provided by the Brazilian General Data Protection Law (“LGPD”).

These reports will not only provide anonymized data that allow objective comparison between wages and remuneration of men and women, but also the proportion of administration, management and leading job positions occupied by women and men. In addition, these reports must provide statistical data regarding other possible inequalities arising from race, ethnicity, nationality and age, in compliance with the LGPD and the specific regulation.

Failure to disclose the report can make the company liable to pay an administrative fine equivalent to 3% of the payroll, limited to 100 minimum wages.

In addition, in cases where there is inequality in wage or remuneration criteria, regardless of non-compliance with the provisions regarding equal pay rights, the company must submit and implement an action plan to mitigate inequality, including targets and deadlines, also ensuring the participation of union and employee representatives in the workplace.

The law also provides that the Brazilian Federal Government will provide reports and other prominent statistical information, in an integrated way and on a public digital platform.

It is not yet clear how companies will publish these reports, nor the criteria used to characterize a situation of “inequality” for developing an action plan as an obligation, which will probably be regulated by ordinances of the Ministry of Labor. However, the Brazilian Federal Government has noticeably been demanding effective measures to foster gender equality, not only from the perspective of wage, but also from occupancy and distribution of job positions.

Law creates new “Women-Friendly Company” certificate

Law No. 14,682, published on September 20, 2023, created the new “Women-Friendly Company” certificate, which is aimed at recognizing companies that implement actions for the inclusion of women who suffered domestic or family violence in the labor market.

To obtain such certificate, the company must prove that at least two of the following criteria have been met:

• reserving at least 2% of the company’s hires to women who have suffered from domestic or family violence, guaranteeing the anonymity of this condition;
• maintaining internal policies to increase the participation of women in senior management positions;
• adopting measures to foster women rights and prevention of domestic and family violence; and
• guaranteeing equal pay between men and women, as provided by article 461 of the Labor Code.

The certificate will be valid for two years, with the possibility of renewal for an equal period, provided that the company continues to adopt the practices that justified its concession.

The procedures to obtain, use, renew, and even the loss of the certificate will be regulated by ordinances of the Federal Government.

Ministry of Development opens public consultation on Brazil Green Seal and Amazon Seal Program

The Ministry of Development’s Secretariat for the Green Economy, Decarbonization and Bioindustry has opened a public consultation for interested parties on the Brazil Green Seal Program and the Amazon Seal Program.

Contributions on the programs can be submitted by November 22, 2023.

The Brazil Green Seal Program is a federal government initiative that aims to develop a national strategy for certification and conformity assessment of Brazilian products and services that have a proven socio-environmentally responsible life cycle. It also aims to reduce the multiplicity of environmental requirements placed on Brazilian products and to unify the various environmental labeling initiatives established by government and private entities.

In parallel, the Amazon Seal Program is a standardization and certification program that aims to establish voluntary standards for products and services produced in the Legal Amazon, with inputs from the region and with the adoption of environmental and social sustainability criteria, becoming an instrument for valuing products from the region.

In order to take part in the public consultations, interested parties must access the “Participa+Brasil” platform to submit comments and suggestions.

Bill regulating the carbon market moves forward

After months of internal discussions, the proposal negotiated by the Federal Government to regulate the carbon market in Brazil (as a substitute for Bill No. 412/2022) was approved by the Senate in a unanimous vote.

According to the text, carbon credits are a negotiable fungible asset, representing the effective reduction of emissions or removal of one ton of carbon dioxide equivalent, obtained from greenhouse gas reduction or removal projects outside the Brazilian Emissions Trading System (“SBCE”), which operates on the basis of the cap-and-trade system, inspired by the European market.

In this model, the government sets a cap on the amount of greenhouse gases that certain economic sectors can emit. This limit is divided into so-called Brazilian Emissions Quotas (“CBEs”).

The system will establish the number of CBEs each company will have for a given period. Companies can then trade these CBEs among themselves with the intention of staying below the cap.

Thus, the bill has defined that companies responsible for emitting greenhouse gases at levels above 10,000 tons of CO2 per year must submit monitoring plans, report their emissions and, if they emit more than 25,000 tons of CO2 per year, they must also submit a report reconciling their obligations, all within the scope of the SBCE.

Alternatively, companies can opt to acquire “Verified Emission Reduction or Removal Certificates” (VERs), which are SBCE bonds issued by other players who carry out activities recognized as reducing emissions. These projects have to meet criteria and methodologies accredited by the government. It is also important to mention that the revenue obtained from the sale of carbon credits will be taxed, in the form of income tax.

It is worth noting that, in the final version of the text, from October 04, the Senate Environment Committee opted to exclude the agricultural sector from these obligations.

Thus, primary agricultural production was not considered as a regulated activity, source or facility subject to the SBCE. In addition, indirect emissions resulting from the production of agricultural inputs or raw materials were also removed from the SBCE.

Due to the heterogeneity of chains and complexity of the emissions inventory, the Senators decided that rural producers will not be obliged to mitigate their emissions through the regulated carbon market, in the same way as the European Emission Trading System – EU-ETS (Directive 2003/87), EU-ETS (Directive 2003/87), which is only mandatory for industrial activities. Rural producers will only be able to issue credits voluntarily and offer them on the market.

The approved text provides for the use of Permanent Preservation Areas (“APP”) and Legal Reserves (“RL”) as eligible for issuing carbon credits, in line with the Forest Code (Federal Law No. 12,651/2012) and the Payments for Environmental Services Law (Federal Law No. 14,119/2021), which allow the use of these areas for market mechanisms. At the same time, indigenous peoples and traditional communities can trade carbon credits generated in their territories.

The issue has been under discussion in Congress since 2021, and five proposals are being processed along with the bill.

If the bill is approved with the current wording, regulations will be published within one year of the law entering into force. After that, companies will have two years to adjust to the rules.

Brazilian Association of Financial and Capital Market updates investment funds regulation and extends sustainability rules

In September 2023, the Brazilian Association of Financial and Capital Market Entities (“ANBIMA”), the self-regulatory entity responsible for the Brazilian capital market, released an updated version of its Code of Administration and Management of Third-Party Funds, a manual that covers the association’s rules for investment funds.

The code came into force on October 02, 2023, but funds set up before that date have a specific deadline for adaptation.

The Code, which was submitted to a public hearing in August 2023, has undergone a series of changes, mainly to make it compatible with the rules of CVM Resolution 175, of December 23, 2022 (Resolution), which entered into force on October 02, 2023, and creates rules for funds that define themselves as “sustainable”. Investment funds in operation on October 02, 2023, have until December 31, 2024, to adapt to the rules of the Resolution, except for credit rights investment funds (“FIDC”), which must adapt by April 01, 2024.

ANBIMA’s rules on the topic of sustainable funds, provided for in the “Rules and Procedures for the Administration and Management of Third-Party Funds”, were previously only applicable to FIDC, fund of funds (fixed-income funds, stock funds or multimarket funds), index funds (“ETF”), among others, and must now also be considered by equity investment funds and real estate investment funds.

The Code establishes that financial institutions can identify funds whose primary objective is sustainable investment by including the suffix “IS” (, in Portuguese, Sustainable Investment). In addition, funds that adopt ESG criteria as part of a broad investment strategy can be recognized, as they have different objectives and consider ESG factors, in which case it is not permitted to use the IS suffix, but rather to include the phrase “this fund integrates ESG concerns into its portfolio management” in their respective marketing materials. In addition, for each type of identification chosen, the Code provides for other rules, more or less restrictive, which also involve the manager of these funds.

Brazilian Association of Financial and Capital Market Entities launches sustainability network to foster ESG agenda in capital markets

In September 2023, the Brazilian Association of Financial and Capital Markets Entities (“ANBIMA”) launched the ANBIMA Sustainability Network, a collaborative forum dedicated to the ESG agenda in capital markets. The project aims to host discussions on global trends regarding sustainability and to provide practical tools and objective standards to support the implementation of the ESG agenda, especially regarding sustainable finance.

The platform is not exclusive to professionals from ANBIMA member institutions, and is also open to sustainability experts, academics and representatives of civil society.

The ANBIMA Sustainability Network will work on four thematic pillars aligned with the UN’s Sustainable Development Goals. Each pillar will have a representative from ANBIMA’s Board of Directors and an ESG specialist to lead the discussions. The areas of activity will include mapping and discussing trends, producing and disseminating knowledge, building practical tools and solutions, and sharing good ESG management practices.

The launch included the creation of working groups with experts in sustainability and capital markets. The Network is open to market professionals, entities interested in the sustainability agenda and the public engaged in the topic. To register for the ANBIMA Sustainability Network, simply fill out the Enrollment Form.

Ministry of Finance opens public consultation for Brazilian Sustainable Taxonomy

The Ministry of Finance opened the public consultation for the Brazilian Sustainable Taxonomy, and accepted contributions until October 20, 2023.

The set of rules will be formally presented at COP 28 to be held in the United Arab Emirates in November.

The aim is to take action to address Brazil’s main environmental and social challenges, considering its commitments and priority plans, as well as reshaping its economic and financial outlook, prioritizing sustainability and regeneration in all of its aspects.

To this end, the action plan drawn up for the development of the tool in 2024 introduces a number of goal categories: strategic, environmental, climate and social.

The first set includes:

• Mobilizing the reallocation of public and private financing and investments towards economic activities with positive environmental, climate and social impacts, seeking sustainable, inclusive and regenerative development;
• Fostering technological innovations aimed at environmental, climate, social and economic sustainability, with an increase in productivity and competitiveness of the Brazilian economy on a sustainable basis; and
• creating solid foundations for the production of reliable information related to sustainable finance.

As for environmental and climate issues, the following are covered: mitigation of climate change; adaptation to climate change; protection and restoration of biodiversity and ecosystems; sustainable use of soil and conservation; management and sustainable use of forests; sustainable use and protection of water and marine resources; the transition to a circular economy; and prevention and control of contamination.

The social aspects include generating decent work and raising incomes; reducing socio-economic inequalities, considering racial and gender aspects; reducing regional and territorial inequalities in Brazil; and improving quality of life by increasing access to basic social services.

The plan also presents a governance structure that will create the Brazilian Sustainable Taxonomy, divided into three distinct levels: (i) a working group that will act in making crucial decisions; (ii) a supervisory committee, coordinated by the Ministry of Finance and made up of entities such as the Ministry of Environment, the Central Bank of Brazil and the Brazilian Development Bank (“BNDES”), which will oversee the process; and (iii) sectoral and thematic technical groups, in partnership with external consultants, to develop the taxonomy criteria.

Finally, it should be noted that, at the end of the process, there will be another period of public consultation, as well as the creation of an advisory committee, with representatives from important sectors to make the tool effective. The taxonomy will be voluntary in the first year and will become mandatory as of 2026.

ESG-Washing: European Union approves green claims regulation

The European Parliament approved a European Commission proposal of a new directive related to ESG, the Green Claims Directive, aiming to increase consumer confidence in green labels and strengthen the protection against greenwashing.

If approved by European Council, the directive will require companies to fulfill applicable criteria and to substantiate their claims on environmental performance by using specific standards, thus enabling a closer monitoring of information transparency and credibility. The directive seeks to ensure that consumers have more transparency and certainty that something sold as “green” really fits the definition.

The key objectives of the directive proposal include:

• Increasing the level of environmental protection and contributing to the acceleration of the green transition towards a circular, clean, and climate-neutral economy in the EU;
• Protecting consumers and companies from greenwashing and enabling consumers to contribute to the acceleration of the green transition by making informed purchasing decisions based on credible environmental claims and labels;
• Improving legal certainty as regards environmental claims and fair conditions in the domestic market, boosting the competitiveness of economic operators that make efforts to increase the environmental sustainability of their products and activities, among others.

Within this context, when a company decides to release a “green claim” about its products or services, minimum standards must be met to substantiate this information and how it is communicated. Before any green claims are released, they should be individually verified by a third party and have their veracity proven with scientific evidence.

Once the Parliament has approved the proposal, a joint approval with the European Council is required so that all products, services, and environmental labels, public or private, that carry green claims will have to comply with evidentiary requirements as to their veracity.

Advice on legislative inadequacy alerts Europe about “Green-Bleaching”

The Green Claims Directive proposal was introduced soon after the Securities and Markets Stakeholder Group from the European Commission (“SMSG”) sent a letter advising the European Securities and Markets Authority (“ESM”) to tighten up the regulatory framework regarding greenwashing.

The SMSG believes that the lack of standards for the definition of the use of green claims in products and services can result not only in greenwashing, but as also in what they call green-bleaching.

From the stakeholders’ perspective, green-bleaching would be the act of not admitting ESG factors of a product to avoid potential legal risks and the additional regulation it would have to follow, which can be just as problematic as greenwashing.

This would happen, for example, if a product can be characterized as sustainable, but the company that produces it does not want to bear the risks, requirements, and regulations that come with the nomenclature, choosing to omit this quality. The definition of what would be sustainable would rule out this phenomenon, since it would facilitate the confirmation whether a product would fit or not in this concept, mitigating any ambiguous interpretations.

The SMSG uses the example of the taxonomy of funds according to the European Sustainable Finance Disclosure Regulation (“SFDR”). According to the SFDR:

• Investment funds that support environmental or social features, contributing to an ESG goal, apply good governance practices, and do not cause any significant harm to their investments, are considered Art. 8 Funds.
• Investment funds whose sole target is sustainable investment, are classified as Art. 9 Funds.

Art. 9 funds require a series of disclosures in addition to those already established by Art. 8 funds.

Thus, green-bleaching would be carried out by a fund that omits information in order to resemble an Art. 8 fund to avoid the stricter regulatory requirements resulting from the Art. 9 classification.

Global sustainability reporting standard to enter into force in early 2024

In 2021, the International Financial Reporting Standards (“IFRS”), a non-profit foundation that develops financial and sustainability reporting standards on a global scale, established the International Sustainability Standards Board (“ISSB”) during COP 26, to unify the development of reporting standards into a single entity on a global scale.

The IFRS proposed two standards, published in June 2023:

• The first, IFRS S1 General Sustainability-Related Disclosures, provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
• The second, IFRS S2 Climate-Related Disclosures establishes specific climate-related disclosures and is designed to be used jointly with IFRS S1.

Companies that choose to use the ISSB’s Standards must report the matters considered material within the contexts of sustainability and climate change. These definitions of materiality are derived from the Sustainability Accounting Standards Board’s (“SASB”), recently incorporated into IFRS to form the ISSB. SASB’s Standards is a non-profit organization that sets sustainability financial reporting standards to facilitate communication between companies and their investors. With the most considerable number of industry standards, SASB identifies the key material ESG factors for each industry.

It is worth noting that the ISSB is not mandatory, except in cases where specific jurisdictions adopt it in the form of regulation. In Brazil, the Securities and Exchange Commission (“CVM”), the Central Bank and the Superintendence of Private Insurance (“SUSEP”) have been moving towards such adoption while referencing international reporting standards for the disclosure regulations of their supervised entities.

Given the variety of sustainability reporting standards in the market, some specific to certain sizes, sectors, or regions, the lack of a single global standard generates doubts and discussions about the materiality of the information disclosed. With the publication of the ISSB standards, even though their application is not mandatory, any company anywhere in the world will have a reference aimed at facilitating the disclosing of information.

International Organization of Securities Commissions endorses ISSB standards

In July 2023, the International Organization of Securities Commissions (“IOSCO”) announced its endorsement of the new financial disclosure sustainability standards of the International Sustainability Standards Board (“ISSB”), which has created the sustainability accounting standard most widely adopted by publicly traded companies in the world.

IOSCO regulates more than 95% of the global financial market, representing 130 regulatory bodies, including the Brazilian Securities and Exchange Commission (CVM), Brazil’s regulatory body. The entity called on its members to adopt the new standards in order to take “an important step towards consistent, comparable and reliable sustainability information” so that investors can “accurately assess risks and opportunities”.

The ISSB, created by the IFRS Foundation at COP26 (2021), aims to develop high quality standards for global sustainability disclosures, in order to meet the needs of investors.

In June 2023, the ISSB published its inaugural standards: IFRS S1, which provides a set of disclosure requirements designed to enable companies to communicate to investors about sustainability-related risks and opportunities in the short, medium and long terms; and IFRS S2, which establishes specific climate-related disclosures and was developed to be used with IFRS S1.

Together, the regulations fully incorporate the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”).

EU proposes new regulation for ESG rating companies

The European Union, through the European Commission, has proposed new regulation for companies that assess ESG ratings.

The proposal applies to ESG rating providers that operate in the European Union. These ratings are publicly disclosed or distributed to financial institutions regulated in the EU, to companies that fall within the scope of Directive 2013/34/EU, and to public authorities in the EU or Member States.

Based on the draft proposal, providers must, if necessary, stop providing advisory services to investors, selling credit ratings, and developing benchmarks in conflict-of-interest scenarios. In addition, providers will have to be authorized and supervised by the European Securities and Markets Authority (ESMA). Failure to comply with the new rules can result in a fine of up to 10% of annual net sales.

In accordance with the proposal’s definition, ESG rating is defined as an opinion, score or combination of both, regarding:

• an entity, a financial instrument, a financial product;
• an undertaking’s ESG profile or characteristics;
• exposure to ESG risks; or
• the impact on people, society and the environment.

These opinions and/or scores are based on an established methodology and defined ranking system of rating categories that are provided to third parties, irrespective of whether such ESG rating is explicitly labelled as ‘rating’ or ‘ESG score’.

According to the Commission that drafted the proposal, the current ESG rating market suffers from shortcomings, and, in some cases, the essential need for trust is not met (as seen in examples of green and social washing).

The proposal aims to facilitate the development of this rating market and contribute to the transition to a system in line with the European Green Deal and UN Sustainable Development Goals.

A regulatory framework would be in line with the proposal’s approach, that is, the indirect action of the EU Reference Regulation, the Credit Rating Agencies Regulation, and the EU Green Bond Standard, which provide ongoing oversight and establish a series of organizational requirements and criteria related to governance processes and documents.

It should be noted that not all ratings are subject to this proposed standard. The proposal is not applicable to private ESG ratings which are not intended for public disclosure, ESG ratings prepared by companies regulated in the EU to provide domestic products and services, ESG ratings which contain ESG information but no scoring or ranking element and ratings produced by public authorities in the EU and its Member States, among others.

In addition, ratings produced by central banks that are not paid by the rating entity and are not released to the public also do not fall under the standard.

Thus, the proposal establishes that any legal entity that wishes to provide ESG ratings in the European Union must be subject to an authorization issued by –ESMA. In the case of countries that are not members of the EU, an equivalent decision, endorsement from an EU ESG rating provider and/or recognition from ESMA is required.

The proposal also clarifies on the disclosure of methodologies:

• ESG rating providers must disclose on their website the rating methodologies, models, and key assumptions used in their ESG rating activities;
• ESMA will develop draft regulatory technical standards to further specify the elements that must be disclosed.

If the competent authorities of a Member State identify the infringement of this proposal in their territory or in another Member State, they must immediately inform the ESMA.

Finally, the proposal is binding in its entirety and directly applicable to all Member States.

New B3 Issuer Regulation involves ESG information

The Brazilian Stock Exchange (“B3”) has published a new version of its Issuer Regulations, which entered into force on August 19, 2023.

New features of this version include Annex B – ESG Measures (“ESG Annex”), which introduces requirements for companies listed on B3 to encourage the reporting of good practices relating to environmental, social and governance (ESG).

The ESG Annex was approved by the CVM, based on the measures proposed by B3 to foster gender diversity and the presence of underrepresented groups (indigenous, black, LGBTQIA+, or people with disabilities) in senior leadership positions, as well as the reporting of good environmental practices by the listed companies.

In general terms, the ESG Annex of the regulation brought three new measures, which must be followed by the applicable companies according to the “comply or explain” mechanism – in which the companies must present evidence of adoption or justification for any total or partial non-adoption of each measure in the Reference Forms. The first reports are scheduled for 2025.

It is important to highlight that the non-adoption of the measures, when justified, neither implies non-compliance with the ESG Annex nor incurs sanctions to the companies, which still hold the prerogative to adopt such measures or not.

In addition, the regulation provides that, if there is a change in the listed companies that impairs, in a supervening manner, the adoption of a measure provided for in the ESG Annex, the corresponding justification must be provided along with the mandatory update of the reference form, by virtue of the regulation, to reflect the change in question.

The report about the implementation of ESG measures must be submitted by all companies listed on any B3 segment, with the exception of those that expressly waive the ESG Annex. Companies already listed will have until 2025 to prove the election of the first member of senior management under the terms of the ESG Annex and until 2026 for the second member – or provide justifications for non-adoption.

For companies intending to go public after the ESG Annex enters into force, the deadlines will be:

1. the year following the listing, for the first diverse person (or the corresponding explanation); and
2. the following year, for the second (or corresponding explanation).

National Monetary Council approves resolution on financing with Climate Fund resources

In August 2023, the Brazilian National Monetary Council (“CMN”) approved a resolution that restructures financing conditions with resources from the National Fund on Climate Change (the “Climate Fund”), linked to the Ministry of the Environment and Climate Change (“MMA”).

The Climate Fund, created by Law No. 12,114/2009, is one of the instruments of the Brazilian Policy on Climate Change (Law No. 12,187/2009). Its purpose is to ensure financing resources for projects aimed at mitigating climate change and adapting to its effects, involving non-reimbursable and reimbursable resources. At the same time, the CMN is the governing body of the National Financial System and is responsible for formulating currency and credit policy, aiming for currency stability and the country’s economic development.

The Brazilian Development Bank (“BNDES”) is the financial agent of the Climate Fund. The approved Resolution reduces the spread (the difference between the purchase price and the sale price of a financial transaction) for financial agents in direct operations with the Bank from 4.5% to 3.5%, and the spread in indirect operations with other authorized financial institutions from 3% to 2.5%.

The return rates on loans to the fund, which were previously 0.1% to 3%, will now be 6.15% to 8%, depending on the purpose of the financing, such as for energy transition projects, green industry and solid waste management. The minimum level of 6.15% is based on the fixed interest rate of the latest Brazilian sovereign emission.

For projects in areas that have less demand for resources and less attractiveness, the rates can be at least 1%, such as those for native forests and water resources, which are expected to consume up to 8% of the resources available in the Climate Fund.

The Resolution introduces six new areas: resilient and sustainable urban development; green industry; green transport logistic, public transport and mobility; energy transition; native forests and water resources; green services and innovation.

It should be noted that in May 2023, the Sustainable Sovereign Finance Committee was created, which defines the framework for the issuance of sustainable sovereign debt securities, expected to occur in 2023, whose resources will be used to finance activities with environmental and social impacts. The Climate Fund will be included as one of the government actions that can benefit from the resources from this fundraising.

Finally, around BRL 10 billion are estimated for contributions to the Fund, in the reimbursable modality, highlighting the importance of the fund for the Brazilian circular economy.

European Union limits trade of products from deforested areas and areas under degradation (Deforestation Act)

A new regulation from the European Union aims to ensure that products and commodities associated with deforestation (legal or illegal) and environmental degradation do not circulate in the European market after December 2020, thus imposing barriers on the circulation, import, and export of such products.

The European Union has recognized the environmental impact generated by the consumption of products manufactured or derived from deforested or degraded areas. Considering its concern about climate crises, biodiversity, and the fulfillment of the European Green Deal, the EU has decided to adopt a position of control and forest protection worldwide, which will have impacts on the production and commercialization practices of major producing and exporting countries.

Initially, there are barriers for cattle, cocoa, coffee, oil palm, rubber, soy, wood, and related products. By June 2025, the European Commission will determine if more products will be added to the list.

The regulation imposes prohibitions and obligations on:

• Operators: any individual or legal entity that, in the course of a commercial activity, places relevant products on the market or exports them;
• Traders: any person in the supply chain other than the operator who, in the course of a commercial activity, makes relevant products available on the market.

As of December 30, 2024, the regulation will establish the following conditions for products to be placed and made available in the market:

• The products cannot be associated with deforestation and must not be derived from areas deforested after December 31, 2020;
• These products must have been produced in compliance with the applicable legislation of the country of production, including environmental protection laws and respect for traditional indigenous communities;
• The products must be covered by a due diligence declaration, which must include the product´s information requirements (geolocation of the land used for the production, the quantity of products), risk assessment (possibility that the products are not compliant with the regulation), and mitigating measures.

The countries will be ranked based on the risk and, depending on their category, the due diligence process can be simplified. The risk category can change according to the guarantees held by that country to produce products not originated from deforested areas.

In case of non-compliance with the regulation, some sanctions can be applied, such as fines (proportionally to the environmental damages and the value of the base or derivative products, in order to remove the offenders’ economic benefits resulting from the infractions. For companies, the fine is up to 4% of the operator or trader’s total annual turnover). In addition, the products can be confiscated and temporarily banned from being placed or made available on the market or from being exported.

The regulation was published on June 09, 2023, in the European Union Official Journal and entered into force on June 29, 2023. However, most obligations, prohibitions, and sanctions will only be applied as of December 30, 2024.

Brazilian government responds to EU deforestation-free regulation

On June 19, 2023, the Executive Management Committee of the Foreign Trade Chamber, of the Ministry of Development, Industry and Foreign Trade, created the Working Group on Trade and Sustainability, through GECEX Resolution No. 483/2023.

The technical group has initiated sectoral consultations in order to obtain technical contributions, comments and suggestions from this sector on the pertinence, impact, and requirements applicable to the Brazilian productive sector of procedural steps, procedures, formalities, controls or requirements relating to the Deforestation-free regulation of the European Union (EU Regulation 2023/1115).

The working group is responsible for:

• Evaluating the pertinence, impact and requirements applicable to the Brazilian productive sector of procedural steps, formalities, controls or requirements related to sustainability measures with an impact on trade and propose measures to the Executive Management Committee of Foreign Trade Chamber to facilitate the adaptation of the industry, in accordance with the applicable law;
• Consulting bodies and entities, public or private, on topics related to sustainability measures with an impact on trade that are subject to evaluation or study by the Working Group on Trade and Sustainability;
• Exchanging information with the productive sector on sustainability measures with an impact on trade, especially with regard to their expectations, needs and difficulties in relation to the adequacy and implementation of such measures; and
• Identifying and disseminating information and good practices related to the implementation of sustainability measures with an impact on trade.

These consultations apply to exporting companies, associations and other entities representing economic interests in the sector that are directly or indirectly involved. The process will be carried out in two steps: the first step aimed to obtain information on this sector’s overview of the EU anti-deforestation law and indicate priorities for action in the sector’s view; and the second step aims to obtain more detailed information on the priorities indicated in the first step.

European Commission publishes the draft of regulation on CBAM´s transition period

On June 13, 2023, the European Commission published the draft regulation for the implementation of the Carbon Border Adjustment Mechanism (“CBAM”).

The CBAM was created by a regulation published in May 2023 and proposed within the context of “Fit for 55” as a method to reduce carbon leakage from the European market that is, to prevent European products from being replaced by more carbon-intensive imports and to ensure that EU-based companies do not transfer their high-carbon-generation production to countries with less stringent climate policies.

By means of the new regulation and considering the European Green Deal, specific reduction targets have been set for the iron, steel, cement, fertilizer, energy, aluminum, and hydrogen industries.

If European industries fail to meet the targets, they will need to buy carbon credits in order to offset emissions that exceeded the limit.

Importers of CBAM’s supervised products will be required to purchase carbon certificates, which are calculated from the value that their production would have contributed to the European Emissions Trading System (European Union Emissions Trading System – “EU ETS”) if their emissions were internal to the European Union. In other words, a hypothetical calculation is carried out of the carbon impact that the product would have had if it had been produced in European territory, within the parameters of the EU ETS, thus generating the amount that the importer must pay to introduce their product in the market. As such, this measure balances the amount invested by European producers to achieve the reduction targets of the EU ETS, but without reducing their competitiveness with cheaper imported products that are intensive in carbon emissions.

The European Commission seeks to apply the Regulation gradually and continuously, allowing for a careful, predictable, and balanced transition for affected businesses that will allow importers to verify the effects of the rule. This will be the transition system of the CBAM, which entered into force on October 01, 2023.

During this transition period, importers of the materials listed above will only be required to report direct and indirect GHG emissions, including those from their production chain (Scope 3). However, indirect emissions for cement and fertilizers will only be reported at later stages.

The permanent system of the CBAM will enter into force on January 01, 2026, from when importers of the products must submit, annually, a statement of the embedded emissions of goods imported into the customs territory of the European Union and would surrender the number of CBAM certificates which correspond to those declared emissions.

The main duties of the declarant will be:

• To report the quantity and types of goods imported;
• To identify the country of origin of the goods;
• Provide information on the facilities where they were produced (including the address and geographic coordinates), the production routes used, the direct embedded emissions and, for steel products, the identification number of the steel mill where the batches of raw material came from, when known.

In addition, the CBAM implementation regulation provides:

• further detailed methods for calculating direct and indirect emissions;
• information to be required in the CBAM report about the price of carbon in the country of origin;
• the structure that must be followed by CBAM report;
• further detailed rules on the evaluation of CBAM reports; and
• further detailed rules on penalties.

New German law generates international socio-environmental impacts on the supply chain

New regulations aimed at guaranteeing socio-environmental rights were introduced in 2023.

On January 01, 2023, the German Act on Corporate Due Diligence Obligations in Supply Chains, Lieferkettensorgfaltspflichtengesetz, entered into force.

The law subjected companies that have administrative headquarters, registered offices or branches in Germany to the obligation to respect human rights through the implementation of due diligence that fosters companies’ transparency and commitment to human rights and environmental issues in the global production of goods and services.

Initially, the law was applicable to companies in Germany, with more than 3,000.00 employees. As of 2024, it will also be applicable to companies with more than 1,000.00 employees.

A major feature of the law is that the new obligations apply, in addition to the business area itself, to actions of a contractual partner and to actions of other (indirect) suppliers. That is, the responsibility of these companies is now extended to the entire supply chain.

The new Law requires internal auditing and in all stages of production on risks involving human rights and the environment.

Due diligence must encompass the company’s entire business, including its affiliates, involving all of its activities, German or international, and its direct and indirect suppliers. The audit still requires that the company:

• Establish a risk management system to identify, prevent and minimize risks in the supply chain.
• Establish preventive measures, such as business strategy, training, and risk control measures.
• Implement remediation measures in the event of actual or imminent human rights violations.
• Establish an internal complaint procedure for individual reporting of possible violations, with subsequent investigation by the company.
• Continuously publish the fulfillment of due diligence obligations, reporting annually on the related actions taken, along with documentation and reports that ensure its transparency.

If the company fails to comply with obligations, it may be subject to substantial fines, which can reach 8 million euros or up to 2% of the annual global turnover, in which case a system based on the volume of business for companies with annual revenues of more than 400 million euros. Added to this is the possibility of exclusion from participation in public bids for up to three years, in cases where an administrative sanction is applied above a certain minimum level.

The law also addresses cases of “sufficient probability” of imminent violation of human rights due to some labor prohibition, such as child or forced labor, any form of slavery, disrespect for work safety and freedom of association, unequal treatment, inadequate remuneration, harmful pollution, excessive use of force, among others.

Regarding environmental matters, the Law focus on risks that could violate human rights, as well as prohibitions on the use of certain chemicals, such as mercury, improper disposal of waste and hazardous substances cross-border trade.