Navigating Towards a More Sustainable Future

Background and main policy developments

The emergence of ESG (environmental, social, and governance) criteria in terms of reporting and due diligence requirements in the global legal and economic landscape is now firmly established. However, the pace and decisiveness with which this trend has developed vary significantly across different markets and jurisdictions.

In general terms, in Latin America, the adoption of reporting standards and corporate due diligence in ESG has been undoubtedly slower and less systematic when compared to jurisdictions like Europe or North America. Nevertheless, the close economic ties between Latin American markets and those economies leading the charge in ESG, have fostered many Latin American companies to adopt ESG practices and standards early, even in the absence of binding domestic legislation, to participate in and capitalise on global trade opportunities.

This is not to say there are no positive examples of institutional efforts to give ESG practices a more binding nature and systematic approach. In this context, Chile stands out in the region as a pioneer in adopting ESG policies, especially concerning environmental and climate change issues. Some of the most noteworthy institutional efforts in recent years in this regard include the following.

• ESG Stock Market Indices – the Dow Jones Sustainability Chile Index, the first sustainability index in Latin America, was launched by the Santiago Stock Exchange and S&P Dow Jones Indices in 2015. This index is notable for spotlighting leading Chilean companies that actively engage in sustainability-related actions. Building on this initiative, in 2021, the S&P IPSA ESG Tilted Index was launched, aiming to measure sustainability performance of the most traded stocks at the Santiago Stock Exchange.
• Green Bond Issuance – in 2019, the Chilean government issued its first sovereign green bond, becoming the first country in Latin America to issue this type of debt instrument. In March 2022, the investment base for these bonds expanded, as Chile became the world’s first country to issue an ESG sovereign bond in US dollars, which matures in 2042. Additionally, in July 2023, a new ESG bond type was introduced, pioneering the inclusion of commitments related to gender equality. These latest ESG bonds mature on 1 November 2037, and feature a 5.3% coupon if the following ESG goals are achieved by Chile:
1. KPI 1 – total greenhouse gas emissions not exceeding 95 metric tons by 2030;
2. KPI 2 – a renewable energy quota of at least 60% in the energy matrix by 2032; and
3. KPI 3 – a minimum of 40% female representation on the boards of companies regulated by the Financial Market Commission (CMF) by 2031.
• Policies by the Central Bank – as highlighted in the closing review of the Strategic Plan of Chile’s Central Bank for 2018–2022, the biannual Financial Stability Report now includes new chapters on climate change. Moreover, the Central Bank approved a new Sustainability Strategy and Policy that addresses climate change by incorporating climate change scenarios in its analysis and quantification of financial stability risks.
• Policies by the Chilean Pensions Supervisor – in 2020, the Chilean Pensions Supervisor published its General Standard No 276, which came into effect in May 2021. This standard compels pension fund administrators and unemployment fund administrators to incorporate ESG factors, including climate risk, in both their investment policies and risk evaluation and management activities.
• Policies by the CMF – since 2015, through General Standards No 385 and No 386, the CMF established regulations on the disclosure of information related to corporate governance, social responsibility, and sustainable development practices adopted by open joint stock corporations. Additionally, the Financial Market Strategy to Address Climate Change, published in 2020, recognises climate change as a financial risk. This strategy aims to promote the disclosure of information and risks related to climate change, foster the development of a green market, and integrate climate risk supervision.

A milestone in terms of the process of integrating ESG disclosures with the rest of a company’s ordinary financial reporting processes was the enactment in 2021 of the General Standard No 461, which supersedes the previous CMF regulations and establishes greater requirements for the disclosure of ESG information.

CMF’s General Standard No 461 and Law No 21,595 on Economic Crimes: a new landscape for the incorporation of ESG standards into corporate disclosure and due diligence processes

CMF’s General Standard No 461

As mentioned, in 2021, the CMF published its General Standard No 461 (“NCG No 461”), which was a pioneering legislation in the region in terms of consolidating and systematising corporate reporting obligations on the environmental, social, and governance (ESG) fields.

In this regard, according to NGC No 461, banks, insurance companies, general fund managers, stock exchanges, and open joint stock corporations must include in their Annual Report to the CMF their ESG policies, objectives, and practices.

This new Annual Report adopts an integrated reporting approach, incorporating the following non-financial information criteria:

• entity profile and ownership;
• corporate governance (including risk management, board of directors integration and background, board of directors’ committees integration and background, chief officials’ responsibilities and background, adherence to domestic or international corporate codes of conduct, and corporate stakeholder and public relationships);
• corporate development strategy and investment plans;
• employees and staff (including diversity metrics, labour and sexual harassment occurrences, occupational safety, training, and benefits);
• business model;
• supply chain management;
• legal and regulatory compliance indicators (related to client, employees, environment, and antitrust);
• sustainability indicators and reporting metrics according to their industry sector as classified by the Sustainable Classification System, as well as the definition of these metrics according to SASB standards;
• relevant or essential facts;
• shareholders and directors’ committee comments; and
• financial reports.

This new reporting standard becomes applicable:

• in relation to the 2022 Report (which was delivered by March 2023), for all open joint stock corporations with total consolidated assets surpassing approximately USD800 million (overall, 81 public companies submitted reports);
• in relation to the 2023 Report (to be delivered by March 2024), for all open joint stock corporations with total consolidated assets surpassing approximately USD40 million; and
• in relation to the 2024 Report (to be delivered by March 2025), for all other special joint stock companies subject to the CMF’s supervision (including banks, financial institutions, insurance companies, general fund managers, and all other publicly traded stock corporations).

Although NCG No 461 has been a crucial milestone in terms of placing ESG reporting obligations on an increasingly equal and integrated foothold with respect to financial risk analysis, it still has several limitations. Firstly, its scope is restricted as it only applies to companies regulated by the CMF, leaving a significant number of companies exempt from reporting on ESG matters. Additionally, NCG No 461 requires only to report on the existence of the corresponding ESG policies, practices, systems and procedures, without imposing any sanctions if the corporation declares the absence of such measures. Moreover, the standard does not mandate external certification of the information disclosed in the Annual Report.

Law No 21,595 on Economic Crimes

In August 2023, Law No 21,595 on Economic Crimes was enacted, introducing a range of significant innovations. These include the creation of the “Economic Crimes” concept, the implementation of a stricter penalty system, and a drastic expansion of the offences for which companies could be criminally liable in comparison to former Law No 20,393 that regulated the Criminal Liability of Legal Entities. Among the matters included are a set of criminal offences related to environmental crimes as well as offences related to corporate governance. Particularly relevant to ESG awareness and its consideration by the highest corporate structures, is Law No 21,595’s inclusion of Article 134 of the Corporations Act as an Economic Crime. This provision concerns the disclosure or approval of false information in a company’s Annual Report, balance sheets, or other legally required records by directors, managers, administrators, or chief executives. This is crucial when considering, as previously mentioned, that NCG No 461 mandated the inclusion of ESG disclosures in the open joint stock corporation’s Annual Report.

Consequently, nowadays, both chief officials or directors that approve a company’s Annual Report in which ESG information is false or misleading, could face harsh penalties including imprisonment. This newfound risk has accelerated the incorporation of ESG considerations, especially in the board meetings of large companies, and will surely have a tempering effect on the use of sustainability language, so common in today’s corporate marketing, especially when the company is unable to provide a well-founded account of the effectiveness of its claims.

Many companies are now in the process of giving their senior management a more prominent role in ESG decision-making and strengthening their due diligence structures. Recent legal changes have also generated a growing demand for the implementation of ESG monitoring systems, the incorporation of ESG risks into the company’s risk matrix, and the adoption of procedures and internal control systems that guarantee the veracity of the Annual Report and compliance with legal and regulatory ESG standards, avoiding any form of misrepresentation and/or greenwashing.

Market pressures for ESG reporting: meeting international consumers’ and financial demands

Although, as mentioned, Chile has seen recent advancements in ESG mandatory reporting regulations, local major companies have been compelled to adopt international reporting standards for several years. This obligation stems from the expectations and pressures of international shareholders, financial institutions, and international clients and customers.

The Chilean economy is deeply integrated into global markets, currently boasting more than 30 international trade agreements. This economic integration, coupled with its role as a raw material producer of goods such as copper and lithium – and possibly green hydrogen in the near future – widely used in renewable energy industries, often means that Chilean businesses are embedded within the supply chains of global companies that are highly committed to decarbonisation and accountability on the social impacts of their operations, due both to pressure from their own stakeholders and to the regulations of the domestic legislation in the countries where they are incorporated. As such companies must provide insights into the emissions and human rights compliance of their suppliers, Chilean companies that provide goods or services to the global market have been subject to ESG soft law nudges for years.

To address this growing demand for accountability on their ESG-related information, Chilean companies have voluntarily incorporated international standards such as the Global Reporting Initiative, Principles for Responsible Investment, and the Task Force on Climate-related Financial Disclosures. Moreover, they have pursued certifications from various global institutions to validate their compliance, aiming to gain a solid foothold in the international markets. Noteworthy certifications sought after by Chilean companies include the Dow Jones Sustainability World Index, ISO 14001, ISO 45001, Initiative for Responsible Mining Assurance, and the Carbon Disclosure Project.

An additional factor for the adoption of ESG reporting and due diligence standards has been the recent but steady increase in sustainable financing, driven by the increasing weight investors place on climate change and other non-financial risks. Climate change stands as a paramount economic risk globally and is a source of financial uncertainty. Thus, omitting climate-related information in economic decision-making can lead to imprecise asset valuations and suboptimal allocation of financial resources. Given this context, both domestic and international investors, whether public or private, are factoring in ESG considerations when deciding on investment projects.

Nationally, the Banking Association, through the Green Agreement, has committed to championing the inclusion of ESG principles in corporate governance and risk management. This includes promoting environmental and social criteria in credit and investment analyses. Internationally, numerous investment companies, such as BlackRock and Barclays, have set up investment funds specifically tailored for sustainable projects aligned with the Paris Agreement’s objectives. As a result, both the Chilean bubbling renewables sector as well as domestic financial institutions are feeling the pressure to integrate both ESG reporting and adherence to various ESG standards, as well as ESG risk assessment to access funding and meet the evolving market demands.

Upcoming foreign ESG reporting standards and their applicability to Chilean companies

As stated, in terms of mandatory ESG disclosure regulation, Chile lags behind current EU and UK legislation. This gap will become even deeper within the upcoming next wave of ESG regulation in the US, the EU, and the UK. Nonetheless, a central aspect of this new legislation is the possibility of direct application to Chilean companies, including their corresponding sanctions regime. While many new Chilean companies will be forced to incorporate these standards in terms of soft law by virtue of being embedded in the supply chain of European or North American companies that will be required to report under scope 2 or even scope 3, some Chilean companies will be directly subjected to these standards as if they were incorporated entities in those jurisdictions.

Securities and Exchange Commission Climate Change Regulations

Although there have been successive delays, it is anticipated that the United States Securities and Exchange Commission (SEC) will release and enact its “Enhancement and Standardization of Climate-Related Disclosures Rules” in the upcoming months. This regulation, which will have progressive implementation, aims to standardise disclosure requirements related to climate change, ensuring that the information remains both comparable and transparent for shareholders, investors, and the general public. Upon the implementation of the SEC’s new disclosure rules, publicly traded companies in the US will be mandated to report varying climate-related risks. These risks are categorised into three disclosure types:

• Material climate impacts.
• Greenhouse gas emissions (GHG).
• Any transition objective or plan.

Concerning GHG emissions, the report should primarily encompass scopes 1 and 2, with scope 3 being included if it is material or if a specific objective exists. Scope 1 addresses the company’s direct GHG emissions, scope 2 pertains to indirect GHG emissions originating from procured energy, and scope 3 concerns GHG emissions from both suppliers and the product’s end-users.

Given the wording of the regulation under discussion, it will not only have a relevant effect in terms of market pressure on the many Chilean companies that supply goods or services to buyers in the US, but will also have direct application for a growing number of Chilean companies that in recent years have opted to trade part of their shares on the New York Stock Exchange.

EU Enhanced ESG Regulations

Conversely, in the European Union, the EU Corporate Sustainability Reporting Directive (CSRD) came into effect on 5 January 2023. Subsequently, on 31 July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS). The ESRS comprises 12 standards categorised into four reporting groups: general, environmental, social, and governance. Collectively, these standards outline the sustainability information companies must report, including ESG-related objectives, annual progress, GHG emissions, sustainability policies, and other related topics. These regulations will not only be enforceable to EU-based companies, but also, starting in 2024, to large non-EU companies trading in the EU market. It is relevant to note that on 18 October 2023 the CSRD announced plans to delay the entry into force of the ESRS for non-EU companies by two years.

There is still a significant degree of unawareness on the part of large Chilean companies regarding the content and scope of these foreign standards that will soon affect them, and the consequent risks of greenwashing and civil litigation. The difficulty of assessing and reporting emissions throughout the supply chain, and above all, the difficulty of harmonising new reporting schemes and criteria that are not fully convergent among themselves, are foreseen as challenges that require special attention.

Climate change and just transition in Chile

In the realm of climate change and sustainable development, as highlighted in the initial section of this article, Chile is recognised as a leader in the region for its proactive approach in adopting ambitious policies to mitigate climate change and ensure a just transition.

Key international climate change policies ratified by Chile

Chile’s initial international commitment to addressing climate change was made by means of the ratification of the United Nations Framework Convention on Climate Change (UNFCCC) in 1994. Subsequently, Chile endorsed the Kyoto Protocol to the UNFCCC in 2004.

In 2015, as a member state of the UN, Chile endorsed the 2030 Agenda for Sustainable Development. This agenda defines 17 goals for environmental, social, and economic advancement (SDGs). A National Council, composed of five state ministers, was established to advise the President on implementing and monitoring the 2030 Agenda.

Chile ratified the Paris Agreement in 2017, following which the nation has assumed various initiatives aligned with the agreement’s commitments. These initiatives aim to address climate change threats, bolster sustainable development, and eradicate poverty. Within this framework, Chile proposed a provisional Nationally Determined Contribution (NDC) in 2015, which, post-agreement, became the country’s official NDC. This NDC was updated in 2020 and 2022, emphasising a just socio-ecological transition, carbon neutrality, and climate resilience. Notably, Chile also joined the Global Methane Pledge at the COP26 in 2021, aiming to cut human-caused methane emissions by at least 30% from 2020 levels.

National climate change policies and legislation

Prominent public policies and regulations to combat climate change and promote sustainable development include the following.

• Green Tax – established in 2014, this tax is levied on emissions of particulate matter, nitrogen oxides, and carbon dioxide. The law was amended in 2020 to include sulfur dioxide emissions and to reduce thresholds for taxation based on annual emission quantities.
• Long-Term Climate Strategy – introduced in 2021, this strategy sets the goal to achieve carbon neutrality by 2050, with periodic reviews every ten years. Additionally, it aims for the country to become climate resilient by 2050 through adaptation actions.
• Decarbonisation of the Energy Matrix Plan – launched in 2019, this plan aims to phase out coal plants by 2040, with a commitment to shut down the eight oldest plants by 2024. The pledge was updated in 2021, committing to close nearly 65% of coal plants by 2025.
• National Green Hydrogen Strategy – unveiled in 2020, its primary goals are to produce the world’s cheapest green hydrogen by 2030, rank among the top three exporters by 2040, and achieve 5 GW electrolysis capacity by 2025.
• Methodological Guide for Considering Climate Change in the Environmental Assessment System – released in early 2023, this guide applies to all environmentally evaluated projects. It stresses the consideration of climate change impacts, greenhouse gas emissions, and potential negative synergies between projects and climate change risks.
• Green Taxonomy – while Chile has yet to release an official green taxonomy, a preliminary committee was formed in 2022 to initiate the work with the participation of experts from a wide range of public agencies, and the support from the private sector.
• Climate Change Framework Law – Law No 21.455 establishes the governance and obligations for Chilean state agencies regarding climate action and legally endorses goals set in the Long-Term Climate Strategy. Notably, Chile became the first developing country to legally commit to carbon neutrality. Various regulations for the application of this law are still pending enactment and publication, which will make the decarbonisation goals binding not only to the State of Chile, but also to private companies, by defining limits and goals by each sector of the economy, to which companies must submit themselves, either by reducing or offsetting their carbon footprints.