EL SALVADOR – How is ESG currently regulated?

In El Salvador, the discussion on ESG (Environmental, Social and Governance) is still at an incipient stage compared to other more advanced countries in this area. Although there has been growing interest in these issues, especially among NGOs and civil society, a consolidated regulatory framework specific to ESG has not been reached.

At the government level, initiatives are mainly ad hoc and are more focused on individual environmental and social aspects than on a comprehensive ESG approach. However, with recent international attention to sustainability issues and pressure from foreign investors, the environment is ripening for more coherent policies.

The arrival of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) has generated discussions within the business sector about the importance of adopting ESG standards. This could accelerate the development of a culture of sustainability disclosure in El Salvador.

In the financial sector, some banking institutions are beginning to implement ESG criteria in their investment and lending strategies. However, the corporate sector in general is not yet fully aligned with these principles.

In summary, although the ESG discussion is gaining traction, there is still a long way to go to establish a robust regulatory framework in El Salvador. The adoption of international standards such as the ISSB could be a significant catalyst to boost ESG regulations in the country.

Up to date, El Salvador does not have a set of mandatory ESG regulations that apply across the board to all companies. However, specific environmental and social laws exist, even if they do not fall under the umbrella of a comprehensive ESG regulation.

Companies in the extractive and construction sector, for example, must comply with certain environmental regulations, and there are labour laws that affect all companies in terms of their social responsibilities. However, these standards are not designed with an integrated ESG approach.

Following the growing global trend, more comprehensive ESG regulations are likely to be considered in the near future, especially if companies wish to attract foreign investment. The adoption of international standards such as the ISSB or the GRI could be a first step in that direction.

It is worth noting that although there is no obligation, some multinational companies operating in El Salvador already follow ESG guidelines as part of their global corporate policies.

In summary, while there is no mandatory ESG regulation, there is a scattered set of laws and regulations that could be considered precursors to a more comprehensive ESG framework. International pressure and changes in investor expectations could accelerate this process.

Regarding the environmental pillar it is worth to mention that the regulations on climate change, natural resource use, or pollution and waste are part of legislation in place. There are existing laws and regulations that address specific environmental issues such as the protection of natural areas, waste management and pollution control. However, these laws are often fragmented and lack a comprehensive approach related to climate change or sustainability in general.

Regarding climate change, El Salvador has ratified international agreements such as the Paris Treaty. Although there is no national climate change policy per se, measures are being taken to mitigate and adapt to its effects, particularly in the agricultural sector and in disaster management.

In terms of natural resource use, there are a number of laws that regulate mineral resource extraction, water management, and biodiversity protection. These laws are applicable to companies and organizations operating in relevant sectors.

As for waste management, there are regulations that oblige companies to responsibly manage industrial and domestic waste. However, recycling infrastructure and systems are insufficient and subject to operational challenges.

In summary, while there are several laws and regulations that touch on aspects of the environmental pillar of ESG, these tend to be specific and often lack a coherent and comprehensive approach. As the ESG issue gains prominence, we are likely to see further integration and updating of these laws.

The social pillar in El Salvador is regulated primarily through labor laws covering working conditions, workplace safety, and workers’ rights. These laws are applicable to all companies and seek to protect human capital.

Product liability is partially covered by consumer protection laws that impose certain obligations on companies in terms of product quality and safety. However, there is no comprehensive legislation addressing corporate social responsibility in this area.

Regarding shareholder opposition and corporate governance, El Salvador has commercial legislation that defines shareholder responsibilities and rights but does not specifically address ESG or sustainability issues in this context.

Other opportunities and social aspects such as inclusion and diversity are beginning to gain attention, but still lack a specific regulatory framework. Some companies are taking the initiative to address these issues voluntarily, but it’s more of an exception than a rule.

In summary, although there are laws that touch on aspects of the social pillar, these are mostly generic and are not designed with a comprehensive ESG approach. As in the case of the environmental pillar, increased awareness and external pressure are likely to lead to more specific and comprehensive regulations in the future.

On the governance aspect, the corporate governance framework in El Salvador is structured mainly by the Commercial Code, which regulates aspects such as the incorporation and operation of companies, the structure of the board of directors, and the fiduciary responsibilities of the directors.

In addition, there are financial regulations that mandate certain levels of transparency and disclosure for publicly traded companies. The Superintendence of the Financial System supervises these regulations.

In terms of business ethics and corporate behavior, there is no specific regulation that establishes standards of ESG conduct, although there are anti-corruption and competition laws that seek to ensure ethical behavior in business.

Although steps are being taken towards better transparency and accountability, many companies in El Salvador still do not adopt sound governance practices, particularly when it comes to transparency and ESG risk management.

In summary, corporate governance in El Salvador is regulated by a legal framework that covers fundamental aspects such as organizational structure and fiduciary responsibilities but lacks an integrated ESG perspective. As with the environmental and social pillars, evolving international standards and investor pressure are expected to lead to reforms in this area.

CENTRAL LAW in El Salvador

Francisco Murillo, associate


Leave a Reply