Machine Translated by Google Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments Securities and Exchange Commission president Marcelo Santos Barbosa Superintendent of Investor Protection and Guidance Jose Alexandre Cavalcanti Vasco Analyst responsible for publication Ana Carolina Velloso Goulart Salarini Visual identity Patrick Gonçalves Cavalcanti Digital version available at: http:// www.investidor.gov.br ©2020 – Securities and Exchange Commission All rights reserved and protected by Law No. 9,610 of February 19, 1998. This material is freely distributed under the terms of the Creative Commons license. Attribution: non-commercial use, creation of derivative works prohibited 3.0 Brasil. Any use not provided for in this license must have prior written authorization from the Securities and Exchange Commission. 2 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments summary 1. What is the impact of your investments? .......................... 04 2. What is Sustainable Finance anyway? ................................. 05 3. And how to identify “ESG investments”? ................................. 07 4. Getting Acquainted with Green Bonds, Social Bonds and Sustainable Bonds ..................................................... ..................... 11 5. Talk to the CVM .......................................................................... 14 3 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments 1 - What is the impact of your investments? Considerations about the environmental and social impact of investments are not exactly new, but the topic of sustainability and its impact on the world of finance has never been so debated and aroused as much interest as it is today. If, on the one hand, there seems to be no international dissent regarding the objective of promoting sustainable development throughout the world1 on the other hand, the definition of , goals in sanitation, health and education, for example, raises the difficult question of how to finance the necessary investments in infrastructure and other areas. It is estimated that only developing countries would need trillions of investments by 20302 being necessary to count as , private financing to fill the gap between the need and the possibilities. It is in this context that the role of the financial system and, in particular, of investors, has been analyzed and discussed, progressively placing the importance of finance in promoting this sustainable development on the radar of governments, the private sector and society in general. The importance comes from both the perception of the role that the financial system can play in financing investment needs to achieve public interest objectives, such as, for example, the construction of an infrastructure that is also sustainable, and the progressive interest of investors, as many are increasingly considering the social and environmental impact of their investments in their financial choices. Although traditionally this topic is of greater interest to institutional investors (pension funds, asset managers, etc.), it has also attracted the attention of retail investors, whether qualified or not, for all sorts of reasons. 1 There are 17 global goals aimed at sustainable development in 5 main perspectives: people, planet, prosperity, partnership and peace. https://nacoesunidas.org/pos2015/agenda2030/ 2 https://unsdg.un.org/resources/unlocking-sdg-financing-findings-early-adopters 4 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments It was with this retail investor in mind, in particular, that the CVM launches this special edition of the Letter to the Investor, presenting the main concepts, in a simplified way, and pointing out where the interested party can obtain information on environmental and social factors about their investments in the capitals. 2 - What is Sustainable Finance anyway? The term sustainable finance is usually used to refer to the integration of environmental, social and governance aspects into investment decision-making processes by financial market actors3 . Therefore, unlike the term sustainability, which usually focuses on environmental aspects, including climate change, the term sustainable finance is broader4 , as illustrated in the figure below: Organizational chart taken from the LAB publication “Sustainable Finance – A panorama (07/06/2020)“ )“, produced by the FIBRAS initiative, with support from the LAB. .com/wp content/uploads/2020/07/Financas_Sustentaveis_Traducao_portugues.pdf The concern of issuing green and sustainable bonds is not just for a few companies. Concern about ESG5 (Environmental, Social and Governance) issues has also been growing among asset managers and administrators, and there is already a movement to adopt such criteria in the choice of portfolio assets6 . In this sense, an ANBIMA survey in 2018 revealed that 85% of managers in the country took into account at least one of the three ESG aspects 3 http://www.labinovacaofinanceira.com/wp-content/uploads/2020/07/Financas_Sustentaveis_Traducao_portugues.pdf 4 Same as above 5 The most widespread term is in its English version: ESG – Environmental, Social and Governance. 6 By way of illustration, Blackrock, one of the largest managers in the world, published a letter to investors to communicate sustainability as its new investment standard. https://www.blackrock.com/br/blackrock-client-letter 5 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments when analyzing investment risks and opportunities, against 68% in 20167 . This question is even more mature on the international stage, which between 2016 and 2019 alone saw a 34% growth in ASG8 investments . In addition to philosophical issues, investing in companies that adopt ESG practices seems to have repercussions on the return on investments. Even if past profitability does not guarantee future returns, there are studies that point out that companies' compliance with ESG issues implies a financial return differential. A comparison between the profitability of companies listed in the socio- environmental index and the IBOVESPA9 , showed that since its creation, in 2005, the ISE B3 presented a performance of +266.19% against +235.43% of the Ibovespa (closing base on 11/26/2019). In the same period, the ISE B3 had even lower volatility: 23.86% compared to 26.51% for the Ibovespa, following a trend that had already been observed in international markets10, proving a superior performance of companies that are concerned with ESG issues . In a more comprehensive analysis involving 2,000 studies on the correlation between ESG investments and financial performance, conducted by researchers at the University of Hamburg, it was shown that there is a positive correlation between the two11. It is believed that this is due to the fact that compliance with ESG issues increases the efficiency of companies, which mitigate the risks inherent to the business12. Therefore, the importance of the capital market in promoting sustainable finance becomes clearer every day, as the allocation of resources to finance projects that observe ESG aspects is essential for sustainable development. 7 https://www.anbima.com.br/pt_br/imprensa/cresce-o-engajamento-das-instituicoes-financeiras-com-a-sustentabilidade-2CA08A8 7679DD57F0167EA5434E54F34.htm 8 Second report published by the Global Sustainable Investment Alliance 2019: http://www.gsi-alliance.org/wp-content uploads/2019/12/Global-Sustainable-Investment-Alliance-TCFD-Poll.pdf 9 http://www.b3.com.br/pt_br/noticias/b3-divulga-a-15-carteira-do.htm#:~:text=29%2F11%2F2019-,B3%20divulga%20a%20 15%C2%AA%20carteira%20do%20ISE%20B3%20%2D%20%C3%8Dndice%20de,36%20a%C3%A7%C3%B5es%20de%2030%20 companies 10 https://www.msci.com/documents/10199/81572e56-da03-4fd5-9001-cf42f09a1b7f 11 Friede, G., Busch, T., Bassen, A (2015) ESG and financial performance: aggregated evidence for more than 2000 empirical studies. 12https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-investing-a-guide-for-investment professionals.ashx 6 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments Investors can also be a relevant actor in the change that is taking place, if they decide to look at their investments not only in terms of better profitability, but also in terms of the positive social and environmental impacts they can generate. In addition, including ESG aspects as a criterion for choosing investments can be an important risk mitigator for an investor's portfolio, as stated above. In the international field, where initiatives aimed at promoting sustainable finance are longer and in greater numbers, one can cite the Principles for Responsible Investments (PRI), an international network of investors (including Brazil) that, with the support of United Nations, work to encourage investors to include in their investment decision-making the analysis of environmental, social and governance issues, in order to contribute to the development of a more sustainable financial system. This type of demand undoubtedly encourages the pursuit of best practices in ESG issues, whether on the part of companies or managers and administrators. As an illustration, in a survey carried out in 2015 by the CFA Institute with its members13, of the respondents who adopted ESG criteria when choosing investments, 44% said they adopted this investment policy due to customer demand. Among the survey respondents who had not yet adopted ESG criteria, 47% indicated that they did not do so because there was no lack of customer demand14. 3 - And how to identify “ESG investments”? Although there are several initiatives that encourage the creation of an ESG taxonomy (classification) in order to provide greater transparency to investors on how to classify “sustainable investments”15, there is still no official taxonomy for these types of investments, as they are a relatively new debate in the financial system and capital markets. 13CFA is the acronym for Chartered Financial Analyst, which is a certification of proficiency in finance offered by the North American institute CFA Institute. 14 Accessed 9/17/2020 https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-investing-a-guide for- investment-professionals.ashx 15 By way of illustration, the World Bank released the guide Developing a National Gree Taxonomy National”), in which it brings parameters on the subject so that each jurisdiction adjusts to its internal context. http://documents1. worldbank.org/curated/en/953011593410423487/pdf/Developing-a-National-Green-Taxonomy-A-World-Bank-Guide.pdf 7 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments However, more broadly, ESG investments are those that finance a sector, company or project that focuses on (A)environmental, (S)social or (G)overnance issues, such as16: sustainable use of natural resources , carbon emissions, energy efficiency, clean technology, racial and gender inclusion and diversity policy, human rights, transparency, ethics, policies and labor relations, data protection, independence of the board of companies, diversity in the composition of the Board of Administration17, compliance with the SDGs, among others. In addition, there are currently some investment strategies that investors can adopt to include ESG criteria when choosing their assets, the most widespread of which are explained in the following table, which was prepared by the CVM for educational purposes18: ** For more details on the strategies see: https://www.anbima.com.br/data/files/1A/50/EE/31/BFDEF610CA9C4DF69B2BA2A8/ANBIMA-Guia-ASG-2019.pdf https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-investing-a-guide-for-investment professionals.ashx After being able to define what ESG issues are and define the investment strategy that best suits them, the investor should seek ESG information about the company or project in which they intend to invest. An example of an initiative aligned with the promotion of sustainable finance is investment crowdfunding , regulated by CVM Instruction No. 588/2017. It is a financial instrument that makes it possible to raise funds for startups and small companies, whose use has grown significantly after regulation by the CVM19. 16There is currently no exhaustive list of ESG issues 17 List taken from ANBIMA's ESG Guide 18CFA https://www.cfainstitute.org/-/media/documents/article/position-paper/esg-issues-in-investing-a-guide-for-investment professionals.ashx 19 https://www.investidor.gov.br/portaldoinvestidor/export/sites/portaldoinvestidor/publicacao/Cadernos/CVM-Caderno-12.pdf 8 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments Investment crowdfunding proved to be an alternative for investors to invest in, before being more restricted to angel investors or venture capital and private equity funds, and facilitated the channeling of these investors' savings to productive investment in nascent or smaller companies, such as which are responsible for the majority of formal jobs in the country and for the greater employability of women20, which ends up meeting several UN SDGs21. It is also worth mentioning B3's initiative to launch indices composed of shares of companies that, at the discretion of B3 and the Deliberative Committee of each index, adopt ESG policies (such as the Corporate Sustainability Index - ISE, the Carbon Efficient Index - ICO222 and the new S&P/ B3 Brasil ESG), and a special listing segment (Novo Mercado23) for companies that voluntarily observe best practices in terms of corporate governance and transparency. Another way of looking for information on whether the company addresses ESG issues in its business strategy is to consult the Reference Form (FRE). This is an official repository that investors can access to learn about the social and environmental risks faced by companies that issue shares and bonds is the Reference Form ( FRE ) , a document required by CVM Instruction No. norm determines the provision of information on: the existence of socio- environmental policies; the costs of environmental recovery; the existence of impacts to the environment; and corporate governance25. The FRE can be consulted on the CVM website, on the B3 website and also in the “Investor Relations” section of the companies’ websites . It is worth mentioning that this instruction is in the process of being revised so that the requirements contained therein, respecting the competences of the CVM, are improved to provide greater transparency of the ESG issues dealt with by the compan 20https://portaldodevelopment.sebrae.com.br/sebrae-aponta-que-pequenas-empresas-geram-mais-empregos-no-brasil/ 21In this case, at least 2 SDGs are met: SDG 5: Deals with gender equality and SDG 8 deals with Decent Work and Economic growth 22They are the ISE (Corporate Sustainability Index) and the ICO2 (Carbon Efficient Index) 23http://www.b3.com.br/pt_br/produtos-e-servicos/solucoes-para-emissores/segmentos-de-listagem/novo-mercado/ 24See items 4.1 j; 7.5 and 7.8 of the FRE. 25The CVM introduced an improvement in the standard based on the Code of the Brazilian Institute of Corporate Governance – IBGC 9 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments If the FRE information is considered insufficient by the investor to make an investment decision, he is encouraged to contact the company directly, even as a way of encouraging the transparency and accuracy of the document (this investor conduct is close to of the shareholding engagement strategy). In the same sense, investors can check whether the company in which they want to invest or which make up the portfolio manager's portfolio has a Sustainability Report, which states whether, and how, the company observes ESG issues or complies with the SDGs26. ! It is worth mentioning the publication “Capital Markets and SDGs27” of a , an initiative fruit 28 partnership between the CVM, B3, GRI (Global Reporting Initiative) and the Glo Pact bal Network Brazil. This document tried to connect the items of the FRE, the GRI standards and the SDGs, in order to encourage issuing companies to adopt sustainable practices and integrate sustainability information into their reporting cycle. Here, however, a caveat is worth mentioning. The fact that the company has a Sustainability Report does not guarantee that the company is in fact practicing ESG measures, despite being an indication that the matter is on the company's agenda . To protect themselves, it is up to the investor to investigate whether the Sustainability Report of the company29 that he intends to invest in is produced in accordance with international standards. In case the information in the report is assured by independent auditors30, it is suggested that the investor seeks to assess the auditor's reputation. 26A total of 147 companies (out of 443) responded to the questionnaire – equivalent to 33% of those listed on B3. 27http://www.b3.com.br/data/files/51/94/4D/DC/A4887610F157B776AC094EA8/Mercado_de_Capitais_e_ODS.pdf 28 It is a pioneering Dutch organization in sustainability, created with the objective of integrating the disclosure of environmental, social and governance performance of institutions. Its guidelines are the most used in the world for the preparation of sustainability reports. The main objective of the GRI Standards is to facilitate the understanding of the guidelines for measuring and evaluating indicators and for communicating the impacts caused, in addition to guaranteeing a standard for the reports. Currently, 75% of the world's largest companies use GRI. http://www.b3.com.br/data/files/51/94/4D/DC/A4887610F157B776AC094EA8/ Mercado_de_Capitais_e_ODS.pdf 29 It is also worth noting that there is currently no regulatory requirement for the company to produce a sustainability report, but only to inform if it does or explain if it does not (which can be found in the FRE). 30It should be noted that currently there is no regulatory requirement that: 1) the company produce a sustainability report; 2) that such report observes pre-defined standards; and 3) the information in the report is assured through an independent third party audit. 10 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments In conclusion, the adoption of ESG criteria in investment decision making seems to gain more relevance every day, not only because of the philosophical aspect of investing in projects that also have positive socio-environmental impacts, but because ESG investments have proven to be more profitable. . As there is no standard label or classification for “ESG investments”, investor education to familiarize themselves not only conceptually but also with tools that help them to seek information on companies’ adoption of ESG policies is still the key. best alternative to avoid being the target of greenwashing situations in which companies create a false appearance of sustainability, without necessarily applying it in practice. 4 - Getting to Know Green Bonds, Bonds Social and Sustainable Bonds In the search for investments that observe ESG aspects, Green, Social and Sustainable Bonds deserve the attention of the investor, as they are also an instrument for promoting sustainable development. Among other challenges, the growth in issuance of these bonds depends in part on issuers and investors increasing their familiarity with the product. These are fixed income securities (debt securities) used to raise funds from investors with the objective of financing projects or assets that have positive attributes, from an environmental, climate, social point of view, or that specifically meet an SDG31: • Green Bonds: finance projects with environmental benefits, including those related to renewable energy, energy efficiency, waste treatment, low-carbon transport, among others. • Social Bonds: finance projects that address social issues and/or seek to achieve positive social results, especially for a vulnerable population, such as the low-income population, minorities, the unemployed, among others. 31Concepts taken from the “Booklet on Sustainable Financial Instruments”, 2019, produced by the Financial Innovation Laboratory (LAB). 11 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments • Sustainable Bonds: finance a combination of projects with environmental and social benefits, if possible based on meeting the SDGs. Examples of regulated financial instruments in Brazil that can be used in this area32 are: The. Shares of Credit Rights Investment Funds (FIDC) B. Agribusiness Receivables Certificate (CRA) ç. Certificate of Real Estate Receivables (CRI) d. debentures and. Incentive infrastructure debentures f. Financial Bills n Promissory Notes Although there is no official taxonomy, there are some parameters disseminated in the market to be observed by bond issuers in order for them to be eligible for the green, social or sustainable denomination. The International Capital Market Association (ICMA) proposes the observance of four principles33: a) the use of resources must be channeled to projects with environmental and/or social benefits; b) there must be a project evaluation and selection process; c) the form of management and allocation of resources must be clear; d) performance communication reports (including Key Performance Indicators – KPIs) must be issued. 32Guide for the issuance of Green Bonds in Brazil - 2016. http://cebds.org/wp-content/uploads/2016/10/Guia_ emiss%C3%A3o_t%C3%ADtulos_verdes_PORT.pdf 33 Concepts taken from the “Booklet on Sustainable Financial Instruments”, 2019, produced within the scope of the Financial Innovation Laboratory (LAB) http://www.labinovacaofinanceira.com/wp-content/uploads/2018/09/relato%CC%81rio_de_pesquisa_ web.pdf 12 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments It is important to remember that today the “green” or “sustainable” denomination of the security is given by the issuer's self-declaration or by an independent third party assessment, and it is necessary for the investor to investigate whether the security issuer observes principles and standards widely disseminated in the market and if the project aligns with its investment philosophy, as per the investment strategies mentioned in the previou 13 Machine Translated by Google Sustainable CVM Series • The Impact of Your Investments 5 - Talk to the CVM For Talkqueries, to CVM complaints and suggestions, use the channels below: For queries, complaints and suggestions, use the channels below: Internet Citizen Assistance Service (SAC) www.cvm.gov.br > Assistance Telephone Check the number at www.cvm.gov.br>Atendimento Letter / In person Investor Protection and Guidance Superintendence: • RJ: Rua Sete de Setembro, 111 - 5th floor - CEP 20050-901 • SP: Rua Cincinato Braga, 340 - 2nd floor - CEP 01333-010 www.cvm.gov.br www.investidor.gov.br cursos.cvm.gov.br pensologoinvisto.cvm.gov.br CVMEducational CVMEducational CVMEducational CVMEducational company/CVM 14 Machine Translated by Google SERIES CVM SUSTAINABLE VOLUME 1 THE IMPACT OF YOUR INVESTMENTS