By: Paola Fonseca, GAIL LATAM Co-Chair

27 July, 2024

GAIL Latin America provides this overview of key developments and opportunities across the region.

Latin America’s dynamic regulatory landscape offers unique opportunities and challenges in the realm of impact law. The region’s socio-economic and environmental context provides fertile ground for pioneering practices that can drive sustainable development. Here are key insights:

1. Disrupting the Narrative: Embracing Mandatory Self-Regulation (MSR)

Mandatory Self-Regulation (MSR) offers a transformative approach to corporate responsibility amid escalating global sustainability challenges. By leveraging existing mandatory compliance models, MSR fosters responsible investment and directs these investments to areas of need across the value chain. This approach is particularly relevant for Latin America, where regulations often require contextual adaptation to avoid disruptive impacts on businesses.

2. Green Taxonomies: A Growing Priority

Latin America is advancing in developing green taxonomies essential for guiding sustainable finance. Countries like Colombia, Mexico, and Chile are at the forefront of efforts to define what qualifies as green or sustainable, facilitating better investment decisions and alignment with global standards. These taxonomies attract international capital focused on sustainability, supporting regional development goals.

3. Impact of IFRS Sustainability Standards

The International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, including IFRS S1 and S2, are set to significantly influence the region. These standards aim to enhance transparency and comparability in sustainability reporting. Latin American companies will need to adapt, which will require significant capacity-building efforts, particularly for SMEs that dominate the region’s economy.

4. Regulatory Challenges in Latin America

Several regulatory challenges persist in the region, including:

  • Fragmented Regulatory Landscape: Diverse regulatory frameworks across countries create complexity for businesses operating regionally.
  • Capacity Constraints: Many regulators and businesses lack the necessary resources and expertise to implement and comply with new regulations.
  • Informal Economy: A significant portion of the economy operates informally, posing challenges for regulatory enforcement and compliance.

5. The Importance of Contextualized Regulations

Regulations must be tailored to the local context to be effective. The European Union’s Deforestation Regulation and the Green Passport initiative exemplify the need for context-aware regulations. These regulations, while well-intentioned, may impose burdens on Latin American sectors like agriculture and textiles if not adapted to local realities.

  • EU Deforestation Rule Impact: The new EU regulation on deforestation is expected to significantly affect Brazilian agriculture by imposing stringent requirements on supply chains, potentially disrupting trade if local contexts are not considered.
  • Green Passport’s Effect on Peruvian Textiles: Similarly, the Green Passport’s sustainability requirements could impact Peru’s textile industry, which relies heavily on exports to the EU.

6. SMEs: Key Actors in Systemic Change

SMEs in Latin America are crucial for economic development and social progress. They represent over 90% of businesses, employ between 60% to 70% of the workforce, and contribute significantly to GDP. Supporting SMEs in complying with global sustainability standards is essential for inclusive growth.

7. Advancing Social and Economic Integration

Efforts to improve social cohesion, economic integration, and governance for migrants, particularly Nicaraguan immigrants in Costa Rica, highlight the region’s commitment to inclusive development. Initiatives aimed at regularizing legal processes, enhancing economic integration, and ensuring social inclusion are crucial for migrant populations, with a focus on women and youth.

8. Legal Support for Social Progress

Law firms play a pivotal role in supporting initiatives that enable social progress. Their commitment to promoting ethics, transparency, and women-led initiatives is instrumental in driving positive change in the region.

9. Law Firms and In-House Counsel: Navigating Regulatory Complexities and Enabling Good Corporate Governance

Law firms assist global clients in navigating the complex regulatory landscape and enabling good corporate governance through several key activities:

  • Regulatory Compliance: Law firms ensure clients comply with diverse and evolving regulations, including IFRS sustainability standards and green taxonomies. They provide guidance on aligning business practices with regulatory requirements, thereby enhancing transparency and accountability.
  • Risk Management: They identify and mitigate risks associated with non-compliance and help clients develop robust risk management frameworks, ensuring businesses are prepared for regulatory changes.
  • Strategic Advisory: Law firms offer strategic guidance on integrating sustainability into business operations, helping clients align with global best practices and local realities. This includes advising on governance structures that support sustainability goals.

For in-house legal counsels, this collaboration with law firms is vital but also presents several challenges:

  • Enhanced Responsibilities: In-house counsels are increasingly responsible for overseeing sustainability compliance and integrating it into corporate governance. This expanded role requires a deep understanding of complex and evolving regulations.
  • Capacity Building: In-house counsels must build expertise in new regulatory areas and sustainability standards to effectively manage compliance and advise their companies. This often involves continuous learning and adaptation.
  • Resource Constraints: Many in-house legal teams face resource constraints, making it challenging to stay abreast of regulatory changes and ensure compliance across all jurisdictions where the company operates.
  • Balancing Priorities: In-house counsels must balance the need for regulatory compliance with other business priorities, ensuring that sustainability goals are met without compromising operational efficiency.

Conclusion

Latin America’s journey towards sustainability and impact law is marked by significant strides and persistent challenges. By embracing Mandatory Self-Regulation, advancing green taxonomies, adapting to IFRS sustainability standards, and addressing regulatory challenges with a contextual approach, the region can harness its full potential. SMEs play a pivotal role in this transformation, driving innovation and inclusive growth. Legal professionals are crucial in supporting these efforts through advocacy, capacity-building, and strategic guidance. Together, we can pave the way for a sustainable and equitable future in Latin America.