/ Sustainable Development and Corporate Governance: Analysis in the light of the draft regulations published by CMF

2 November, 2020

Adequate risk management and the exploitation of new business opportunities are not and will not be possible without the active involvement of the corporate governance of the companies. For such involvement to take place, it is necessary that the board of directors and the top management have quality information to make the best decisions, since experience has shown that if the top management of the companies does not understand the strategic importance that sustainability has for their business, it is impossible to generate a real and effective commitment with the management of ESG criteria.

Nicole Cartier
Gabriel Arancibia
Associate Attorneys


What is the effect of the mega-drought that Chile is experiencing today on the financial results of a wine, agricultural or mining company? What is the financial impact on insurance and reinsurance companies, fund managers, real estate or tourism companies, due to the significant increase in wildfires? How does COVID-19 or the digitalization of its processes impact a company and its employees financially and operationally? All these are some of the questions that companies, today more than ever, must start to take seriously into account.

The context of the current pandemic and the consequences generated by climate change, have revealed the urgency for companies to begin, if they have not already done so, to adopt strategies that incorporate into their business models the analysis, monitoring and management of risks associated with non-financial aspects, such as the so-called environmental, social and governance (ESG) criteria, to configure a robust internal policy that allows for sustainable development over time.

Under this vision, and fulfilling its legal mandate to ensure the stability and development of the financial system, in January 2020 the Financial Market Commission (CMF) carried out a consultation process on the project to amend the General Applicability Rule 386 (NCG 386), which incorporated the Social Responsibility and Sustainable Development report into the annual report of the companies subject to its supervision. Through this process, the CMF seeks to improve this rule to create a standard of disclosure of ESG criteria in accordance with international recommendations and to allow the issuers of securities the timely detection of risks, their proper management and openness to new business opportunities that arise precisely when considering these non-financial variables.

In order to achieve this goal, the concept of materiality in ESG criteria promoted by the CMF in its regulations must be related to the incorporation of the obligation to disclose both direct and internal aspects of the companies (those produced by the companies in their environment, such as recycling policy, carbon footprint measurement, training programs for workers or anti-corruption policies), such as indirect or external ones that impact their financial statements (those to which companies are exposed, for example in their relationship with suppliers, customers and stakeholders in general, as well as the physical and transition risks of climate change).

Thus, a standard that correctly balances these aspects could have the virtue, among others, of promoting a more stable financial market, reducing the systemic risk that the lack of management of ESG risks in this and in companies could cause, as well as helping to mobilize funds towards projects aligned with sustainable development objectives.

Along with the foregoing, the CMF also intends to advance towards the amendment of NCG 385 on the disclosure of good corporate governance practices, so that ESG criteria are a topic that is incorporated into the internal management of companies, where they are part of their strategy, and that they directly involve directors and senior management in the creation of risk management policies and instruments.

Adequate risk management and taking advantage of new business opportunities are not and will not be possible without the active involvement of the companies’ corporate governance. For such involvement to occur, it is necessary that the board of directors and senior management have quality information to make the best decisions, because experience has shown that if the senior management of companies does not understand the strategic importance of sustainability for their business, it is impossible to generate a real and effective commitment to the management of ESG criteria.

Only an effective corporate governance allows early detection of situations of money laundering, corruption, bribery, illegal financing of politics, anti-competitive behavior, practices that threaten environmental institutions and the commission of crimes in general, thus ensuring adequate protection of shareholder investment, the creation of value – and not its destruction, and finally the generation of better and more information for shareholders, investors, regulators and the public in general.

The importance of what the CMF is promoting is also given by the fact that by establishing a standard of disclosure of ESG criteria in the companies under its supervision, at the same time it encourages them to open up to new business opportunities. In this sense, the United Nations has indicated that in order to finance Agenda 2030, which establishes the 17 Sustainable Development Goals at the global level, it will be necessary to mobilize at least a figure close to USD 7 billion per year in investment and projects during this decade. The foregoing, especially for those companies with sustainability strategies, opens up tremendous possibilities for capturing investments in industries such as energy, technology, infrastructure, and transportation, among many others. In fact, as of February of this year, non-conventional renewable energy projects worth around USD 2 billion had already entered the Environmental Assessment System. Likewise, there is a growing number of investors, both globally and locally, who have proven in practice that investing in companies that have a clear strategy of ESG risk management is less risky in the long term than traditional investments, and that even, have shown better returns than the latter in times of high volatility like the present.

In this sense, the purpose of the new NCG 386 and the future changes that are being sought to introduce also to the NCG 385, are in line with the development of a more stable financial market, as well as with what investors are asking today at a global level.

This, due to the fact that having a standard that promotes in the local financial market that the issuers improve the management of the key ESG criteria for their financial behavior, will strengthen the long term economic viability of them and with it the creation of value. This will require a balanced combination of the interests of shareholders and other stakeholders with investment in projects that are aligned with sustainability standards.