ESG in Brazil: Carbon market to transfer pricing challenges
March 13, 2024
Sector: ESG
Discussions about ESG strategies have been becoming increasingly common on a global scale, with ESG in Brazil actively developing its own initiatives. A complex and strategic move that is shifting dynamics in the global economy, the culture of environmental, social, and corporate governance brings a myriad of issues that warrant careful analysis.
ESG in Brazil legislation
On the legislative front, the House of Representatives in Brazil passed PL 2148/15, which proposes the regulation of the carbon market in the country and the establishment of the Brazilian System of Greenhouse Gas Emissions Trading (SBCE), which sets emission caps and establishes a market for the sale of credits. For now, we are waiting for the proposal to undergo analysis and approval by the Senate.
Besides establishing unprecedented regulations in Brazil, initiatives like this significantly influence the national business environment, not only concerning domestic aspects.
Reporting ESG in Brazil
In this scenario, there is optimism for Brazil and for Latin America. According to information from the UNCTAD‘s World Investment Report 2023 – United
Nations Conference on Trade and Development – foreign direct investments in Latin America and the Caribbean increased by 51%, reaching $208 billion in 2022. In Brazil, the increase was 70% ($86 billion).
According to the report, international investments in SDG sectors and activities – which relate to the Sustainable Development Goals established by the UN – also increased in 2022, resulting in the growth of projects in infrastructure, energy, water, sanitation, agricultural systems, health, and education.
The carbon offset market’s structure
Firstly, PL No. 2,148/2015 establishes a limit for greenhouse gas emissions within the corporate scope. Thus, it proposes that companies surpassing pollution levels must offset their emissions by buying credits, while those falling short of emission caps receive quotas that are tradable in the market.
The purpose is to create incentives in a way that can curb emissions and consequently the climate impacts caused by companies.
In a second stage, the regulated market of offset credits and generation of credits based on the level of greenhouse gas emissions, linked to the SBCE, comes into play. The proposal suggests a system in which Brazilian emission quotas (CBE) and certificates for verified emission reduction or removal (CRVE) can be traded.
Regarding regulation, studies already indicate that it could lead to positive economic shifts: according to research from Banco BV (BV Bank), the regulated carbon market could generate R$ 48 billion annually for the country.
Challenges
In addition to encouraging new practices in business operations, the implementation of a market guided by an ESG vision brings forth debates and initiatives in the tax aspect of organisations as well. In recent years, there has been discussion about the adoption of carbon taxes in Brazil and their potential consequences in terms of economic, financial, and social aspects.
However, a point that is not always recalled and brings with it particular challenges involves transfer pricing within the context of globalised markets or even in the transfer of goods and services between companies of the same group but headquartered in different countries.
On top of the requirement that the arbitrated price complies with RFB regulations in the case of Brazilian companies–responding to the pillars of corporate and tax governance–the new adoption of ESG indicators influences the macroeconomic dynamics between countries/multinationals themselves.
Therefore, the challenging aspects related to transfer pricing from an ESG perspective encompass everything from the costs of the value chain to a more detailed analysis of a company’s risks and its transfer assets concerning sustainable practices from an organisational standpoint.
Sustainable investments
Finally, in Brazil, the investment sector is one of the drivers of ESG practices in the market. Recent studies indicate, for example, that investors in Brazil also base their decisions on ESG disclosures from companies.
Thus, paying attention to the new economic paradigms that are moving towards sustainability has become imperative for companies, not just in terms of rhetoric, but especially to remain attractive and competitive in markets where sustainability is no longer a distant goal.
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