New reporting duties regarding ESG standards and possible scenarios of shareholder litigation under Chilean law
Mónica Pérez Quintana
Carey, Santiago
Fernanda Torres Mac-Pherson
Carey, Santiago
Current ESG standards regulation in the Chilean Stock Market
As has been the general trend in several Latin American countries, ESG factors have been slowly entering the Chilean business world.
According to some studies, during the last three years, the primary corporate efforts from Chilean companies have been addressed to redesign the operating processes and systems with better ESG standards. However, companies are still reporting low or intermediate levels of progress in ESG matters, especially in investing in fixed assets and strengthening management teams to respond to these issues.1
In this regard, according to the Financial Market Commission ('CMF')2, as of September 2022, only 1 per cent of the assets under its supervision were managed under strict ESG criteria. In addition, there is not a wide variety of sustainable funds to invest in Chile, and the ones offered are usually managed from abroad.3 This delay in adopting ESG criteria has also been encouraged by a deficient and scarce regulation, which has not developed incentives for adopting these international standards.
However, a recent regulatory change will likely accelerate the introduction of ESG standards to the Chilean business agenda. In November 2021, the CMF issued General Rule No. 461 ('Rule No. 461'), by which it became mandatory for most open corporations to include environmental, social, and governance information in their annual reports according to international standards of information delivery. For instance, companies were mandated to provide information on, inter alia, corporate governance, risk management, relationships with stakeholders, indicators related to their workers such as diversity or wage gaps, and compliance with customers and environmental matters.
This is the first step to promote the creation of a financial market that facilitates the adaptation and mitigation of existing environmental and social risks, as well as the incorporation of them into the internal risk management of Chilean companies. In this sense, through this new regulation, the CMF looks for entities to disclose quality information to the market and to allow investors and stakeholders to evaluate the sophistication of their management.
It is important to note that Rule No. 461 – recognising the need for corporations to adapt – has established deferred deadlines for its entry into force. Thus, this year, only open corporations whose total consolidated assets exceeded USD 800 million approx. were required to report this information. Next year, it will also be mandatory for companies with assets exceeding USD 40 million approx. to do the same. In 2025, other companies like banks, insurance companies, and stock exchanges, among others, will also have to comply with the requirement.
Therefore, this year was the first one in which some companies had mandatory duties of information regarding ESG Standards. The CMF has already published the results: 24 per cent of traded corporations, representing 54 per cent of the total assets of the stock market, disclosed information. The CMF concluded that 'it is still premature to assess the integration and management of sustainability-related risks and opportunities in the first reporting exercise in 2023: there is a wide divergence in formats, reporting layout of information and form of delivery, standardization was not as strong but was expected within the process.'4
Shareholders' disputes as a new future litigation challenge
Different consequences may arise from establishing several reporting duties regarding ESG standards. First, the CMF will now be able to impose sanctions on the companies that fail to provide accurate information on their actions and guidelines concerning ESG criteria. This, in turn, could generate criminal liability for the companies’ boards.
However, this mandatory exposure of information to the market may bring litigation risks with shareholders that were considered highly unlikely to occur before the issuing of Rule No. 461. In the Chilean legal system, article 133 bis of Law No. 18.046 for Chilean Corporations ('Corporations Law') grants shareholders a compensation action against the board and managers of a company, which they can file in its name and for its benefit.5 In addition, shareholders are entitled to file an action in tort against the company’s board and its main executives if they can prove a personal damage different than the one suffered by the corporation.6
We estimate that the actions that the shareholders may bring against the corporate governance of their companies could be of three types.
Actions for the disclosure of false information regarding ESG standards
Following the same trend that has been seen in other jurisdictions, a primary litigation risk that could be foreseen are potential lawsuits filed by shareholders against the relevant governing body in respect of activities that could constitute greenwashing. The basis for these actions would be the disclosure of false or inaccurate information to the market about the adoption of ESG criteria to attract capital and funds that are looking to invest in sustainable companies. These lawsuits may be typically filed by 'green' shareholders who invested in a company precisely because of its sustainability.
According to the Corporations Law, this behaviour could only generate the board or main executives’ liability towards the shareholders if it produces damage to the company (derivative actions) and/or to the shareholders (personal action). A possible claim in this regard could be that the company’s environmental or social negative effect that was supposed to be avoided according to the inaccurate information delivered to the market, is a financial risk for achieving long-term profits that the investor did not want to assume. In this regard, although some investors prefer ESG funds or companies based on ethical criteria, in several cases following ESG standards is not a decision based on non-financial criteria but an obligation from the fiduciary duty to maximize the wealth being managed.
Another claim could be the reputational impact for engaging in this type of conduct which can produce detrimental economic effects, especially in the case of public traded companies, in which there is a public interest in strengthening the confidence of investors.7
Finally, a related issue that could be brought in these conflicts could arise from commitments or aspirations publicly made by a company about ESG standards that end up not being implemented or sustained through time due to some external circumstances. This could be, for instance, a change in the market that causes a diversion in investment decisions that is inconsistent with what had been previously declared. Several questions arise in these cases: Are corporations obliged to comply with these commitments or aspirations? Will this depend on how the company provides the information to the CMF and if the expectation could be validly generated? All these issues will probably be discussed before Arbitrators or our Civil Courts, and their determination will depend on the position that is ultimately taken
Actions for negligence of corporate governance for not adopting ESG standards in the operation of the company
Secondly, there may be a proliferation of potential lawsuits to pursue corporate governance liability for the loss of value of a company caused by the lack of diligence regarding ESG matters. In this sense, there could be several situations in which damage to the company could be caused due to the negligence of its corporate governance on these matters, and in respect of which compensation may be claimed by shareholders through a derivative action. These can include reputational damages, negative impacts on profitability for investment decisions that are not in line with ESG standards.
Actions for the breach of fiduciary duties because of investment decisions based on ESG standards
Finally, another litigation risk may arise in the opposite way: potential lawsuits filed by shareholders against the board or governing executives for breach of the fiduciary duty to act in the best interests of the shareholders and of the corporation. These conflicts could arise when a company invests in sustainable funds or assets or adopts market decisions based on ESG criteria, attending to the stakeholders’ interests, even though the profit obtained would have been higher if the ESG standards had not been considered.
This will be a topic of debate among our arbitrators and civil courts because, according to Article 42 of the Corporations Law, the board and the main executives may not, in general, engage in acts that are illegal or contrary to the bylaws or the corporate interest. Therefore, they have a fiduciary duty to always attend to the corporate interest.
The main issue is that this concept has not been legally defined. Some authors identify it with the common interest of the shareholders and others with a permanent notion of the corporation that transcends the shareholders.8 However, regardless of the theory adopted, there is no consensus on whether the corporate interest allows the consideration of third-party interests, such as other stakeholders, jointly or in priority to the shareholders and the company’s interest of maximizing their profits, which, mindful of the definition of corporation provided by article 2053 of the Chilean Civil Code,9 seems to be its main purpose.
Therefore, the chances of success of these claims will depend on the 'corporate interest' concept adopted by the arbitrators and civil courts and, more particularly, the determination of whether corporate governance is allowed to take into consideration the interest of any external agent, and the fact that stakeholders could negatively or positively affect the satisfaction of the corporate interest. Perhaps, if ESG standards begin to permeate the Chilean economy, a legal amendment that expressly recognizes the possibility of corporate governance of addressing the interests of third parties other than shareholders will be needed.
Conclusion
The Chilean legal system is at a very early stage in implementing ESG disclosure requirements, which are currently mandatory only for some of the open corporations. Therefore, many regulatory changes must be made for ESG standards to become an economic asset pursued by companies to attract investors and achieve long-term profits.
However, it is crucial to identify the associated litigation risks as early as possible because litigation may become an unavoidable reality that must be prevented through an exhaustive and careful assessment of every company’s position on its own facts.
1 Acción Empresas and Center for Corporate Governance and Society, University of Andes. 'ESG in Chile: perspectives, advances, the role of boards and the challenges of its implementation', July 2023. p15.
2 Chilean Technical public service whose main objectives are to ensure the correct functioning, development, and stability of the financial market, facilitating the participation of market agents and promoting the protection of public faith.
3 Article in El Mercurio 'The market prepares for an anti-greenwashing rule of the Financial Market Commission', 28 September 2023.
4 Financial Market Commission. Integrated Memory. Expectations and guidelines in light of Rule No. 461. August 2023.
5 'Article 133 bis. Any loss incurred to the assets of the corporation as a result of an infringement of this law, its regulations, the bylaws, the rules issued by the Board in accordance with the law or the rules issued by the Comission, shall entitle a shareholder or a group of shareholders representing at least 5% of the shares issues by the Corporation or any of the members of the board to sue damages to whom it may concern, in the name and for the Benefit of the corporation (…)'.
6 Barros, Enrique. Treatise on tort liability. Second Edition. Editorial Jurídica de Chile. Santiago. p916.
7 Ibíd.
8 Pffefer Urquiaga, Francisco. Duty of loyalty of directors and managers of corporations within a group of companies to the light of the so-called Cascada Case. Actualidad Jurídica Magazine. No. 32, July 2015 quoting Puelma Accorsi, Álvaro (1996). Corporations. Santiago, Editorial Jurídica de Chile, Vol. I and II, pp. 544-545 and Alcalde Rodríguez, Enrique. Relation between the corporate interest and personal interest of the board in a corporation. Actualiad Jurídica Magazine, N° 4, 2001.
9 'Article 2053. A company is a legal act by which one or more people stipulate to make a contribution in money, with the aim of obtaining profits from it. The company forms a legal person different from the partner or partners individually considered'.