Cost of Capital and ESG Disclosure Scores of listed Brazilian companies
Several stakeholders have increasingly expressed their concerns about the environmental, social, and governance (ESG) practices of companies they have business, work with, invest in or whose services and products they consume.
According to the Global Sustainable Investment Alliance, by 2020, more than US$35.3 trillion were invested in the major financial markets of United States, Canada, Japan, Australasia and Europe following practices of responsible or sustainable investment. This figure grew 15% in two years, and represented 36% of all professionally managed assets across those regions.
As a result, an increasing number of companies commit to ESG practices and disclose them , despite the lack of an international standard, framework or guideline for ESG reporting 1 . Locally, Brazil’s Securities and Exchange Commission (CVM) issued Resolution CVM 59 in December 2021 to amend provisions of its Instruction CVM 480 on the rules on information disclosure by issuers of securities. The Resolution provides information requirements aimed at increasing transparency on disclosure of environmental, social and corporate governance practices (ESG) by publicly-held Brazilian companies. CVM Resolution 59 will come into effect on January 2023.
As so far ESG disclosure has not been mandatory in Brazil, companies have had flexibility to disclose what they consider more relevant, being able to decide whether or not to publish ESG information. In regard to that, by the end of 2020, only 119 of the 408 companies listed on B3 made ESG-related information publicly available for Bloomberg’s ESG Disclosure Score Rating, which ranges from 0 to 100 and does not measure performance but transparency of ESG information.
From those 119 scores available, EDP Brasil, an energy-sector company, had the highest ESG Disclosure score (71.44), followed by the pulp and paper manufacturer Suzano (63.28) and the oil company Petrobras (61.22). The average score for Brazilian companies was 43.36 and the lowest was 19.37. The chart below shows the 14 Brazilian companies with the highest ESG Disclosure scores in 2020.
Brazilian listed companies with the highest ESG Disclosure Scores 2021
Despite the growing interest on the ESG agenda, the discussion whether ESG good practices could drive firm’s value creation or financial performance divides opinion among practitioners and finance scholars. Supporting the conclusion that companies with strong ESG performance also score highly on traditional financial metrics, some studies have demonstrated that good ESGpractices lower the cost of capital in terms of debt and equity.
What does Brazilian data tell us? The graph bellow shows the relationship between ESG Disclosure Scores and the Weighted Average Cost of Capital (WACC) for that group of 119 Brazilian listed companies.
The chart illustrates the negative relation between the two variables, even though the
trendline is slightly downward sloping, it seems to suggest that companies with higher
ESG scores have lower cost of capital.