By Fabio de Almeida Braga
Nowadays, social and environmental issues undeniably take a privileged position in the agendas of countless discussions, including academic studies and political decisions. These issues require the government to take a stand and develop public policies to be implemented and supervised by competent agencies, including the Judiciary.
Social and environmental issues are of considerable relevance and economic importance, as shown by the current shortage of water in some of the greatest urban centers of Brazil. Therefore, means and mechanisms that allow for a balance between national social and economic development and preservation of natural resources have to be thoroughly examined. The target is to achieve balance between society, market and environment, creating a scenario of social and environmental justice. Policies that lead to a sustainable economic system have to be developed and implemented.
Sustainability as a self-sufficiency concept reveals a concern with the development of technologies and relational methods that enable quick access to renewable resources in order to meet the demands of the market and the consumption of society. The combination of social and economic development and strict respect for human rights is an essential part of sustainability. This combination also promotes workforce qualification and eradication of serious problems related to urgent social issues, such as slavery, child labor and universal access to efficient public health systems like basic sanitation. Sustainable social and economic development also promotes appreciation of life and the dignity of human beings.
There is absolutely no way social and environmental issues can be handled apart from the traditional production and consumption economy. And, given that credit plays a very important role in this traditional economic model, financial institutions are naturally affected, as they are responsible for credit activities.
Social and Environmental Self-Regulation in the Financial System
Social and environmental issues became a concern for financial institutions when the International Finance Corporation, an entity bound to the World Bank, established a set of principles, called Equator Principles, which were adopted by some financial institutions on an international scale. Defined as guidelines, these principles aim to guide the operations of banks according to policies of credit granting and risk management in social and environmental matters that result from financing economic projects and activities that could damage the environment and social relations, including human rights.
By adopting and monitoring credit granting criteria, financial institutions that adhere to the Equator Principles grant credit to finance projects only if the economic agents adopt practices that effectively offer the following: (i) biodiversity protection and pollution control; (ii) protection of health and cultural and ethnic diversity; (iii) assessment of social impacts, including impacts on the native population; (iv) compensation for the population affected by the project implementation; (v) efficiency related to water resources and use of renewable energy sources; and (vi) respect for human rights and elimination of child labor.
It is incumbent upon financial institutions, through their credit risk selection, to adhere to the principles by suggesting that projects be duly adjusted to mitigate possible risks arising from their implementation. In practice, the principles are applied in accordance with social and environmental classification. The projects eligible for financing are classified as follows: Category A for high risk projects, Category B for average risk projects and Category C for low risk ones. The categorization of risk from high to low considers the possibility of diverse, irreversible or unprecedented impact on the environment, society and human populations.
For Category A projects, an environmental management plan is developed and applied upon careful monitoring by the financing institution. The Equator Principles are revised from time to time, and they provide as a criterion for project inclusion the financed amount, which must be at least US$ 10 million. However, adherence to such principles is not mandatory; the institution chooses whether or not to commit to a self-regulation program.
Signed in 2009, the Green Protocol (Protocolo Verde) nationalized the Equator Principles. Pursuant to the Protocol, financial institutions attempted to do the following: (i) offer credit facilities and programs that foster life quality and sustainable use of natural resources; (ii) consider the social and environmental impacts and costs in asset management and project analysis; (iii) promote consumption awareness; and (iv) inform, sensitize and engage interested parties in sustainable policies. It is worth pointing out that although this is a voluntary commitment, compliance with the terms of the Green Protocol and the Equator Principles has been demanded by the Prosecution Office and the Judiciary.
Another fairly successful experience in the corporate self-regulation area comes from the widely disseminated management practices recommended by the International Organization for Standardization (ISO). In regards to environmental issues, the best practices are included in the ISO 14000 series, which sets out measures for sustainable corporate management from the environmental standpoint. Like other self-regulation programs, adoption of these measures is optional. The institution may be awarded by ISO a certification stating that its environmental management is in compliance with the sustainability standards proposed by ISO 14001. Thus, the certified institution undertakes to abide by the applicable environmental legislation in its activities.
The ISO 14001 certification does not exempt the certified institution from the effects of inspection by environmental agencies, nor does it ensure that no environmental drawbacks or irregularities will occur during the performance of the certified institution's activities. Therefore, ISO 14001 is not able to keep the certified institution safe from liability for environmental damage.
It is worth mentioning: the Corporate Sustainability Index of BMF&Bovespa reflects the return on a stock portfolio of companies that adopt social and environmental responsibility practices in the Brazilian market. A company is admitted in the list of issuers of shares of ISE Bovespa only upon joint resolution by BMF&Bovespa, environmental non-governmental organizations (NGOs), Fundação Getúlio Vargas (FGV) and the Prosecution Office. The selection of companies is annual and takes into consideration the company's relationship with the community and its employees, as well as its corporate governance program and the environmental impact of its activities.
The ISE maintains a specific group (Group IF) for financial institutions and insurers. The creation of a specific group for financial institutions in ISE reflects investors’ concerns over environmental liabilities of institutions that may finance potentially polluting activities. The sustainability of companies listed on the ISE is controlled by the ISE board, which monitors the technical management of corporate actions aimed at the environment, and also by the community, which participates in this index through public hearings in which the population can evaluate the companies listed on ISE.
It is known that the Judiciary and the Prosecution Office often reference the Green Protocol and the Declaration of Principles for Sustainable Development when referring to voluntary protocols. The effective implementation of the measures and principles set out in those documents could meet the conditions of Law no. 6938/81. It is possible to assume that adopting parameters and principles set forth by the Green Protocol and the Declaration of Principles for Sustainable Development could be considered by the government as a way of complying with the principles and obligations of the National Environmental Policy.
Although discussions about the adhesion of financial institutions to voluntary protocols are fairly recent, there are examples of the Judiciary seeking to force financial institutions to uphold the principles of voluntary protocols they agreed to, especially with regard to the Green Protocol and the Declaration of Principles for Sustainable Development. Still, there is no statutory provision determining the adherence of financial institutions to these protocols.
The Judiciary has been considering the development of protocols in compliance with the obligations imposed by article 12 of Law no. 6938/1981. Voluntary protocols and commitments that establish parameters and criteria to grant credit to companies duly licensed and in compliance with environmental legislation would be linked to the statutory obligation imposed on financial institutions. The adherence to voluntary protocols may be understood as a preventive measure to protect the environment. Financial institutions that effectively serve the purposes of the Green Protocol, for instance, would end up being able to prove that their activities are performed in compliance with article 12 of Law no. 6938/1981.
Indeed, even if a financial institution does not directly perform the polluting activities of the company to which it grants credit, it would not be released from adopting measures to prevent environmental damages. Although the adherence to voluntary protocols and compliance with their targets and principles fulfills the obligation imposed on financial institutions with regard to requirements to grant credit to specific undertakings, they could not be considered as mitigating factors in the determination of penalties imposed due to environmental damages in the civil, administrative and criminal levels.
Implementation of the Social and Environment Responsibility Policy by Financial Institutions
Despite the initiative of self-regulation of financial institutions through the Equator Principles, with the amendment to Resolution 4327 of the National Monetary Council, on April 25, 2014, Brazilian institutions were required to comply with the specific provisions on their involvement in situations that could potentially pose social and environmental risks.
The recently amended Resolution establishes that institutions are required to create and apply, while performing their activities, operating principles related to social and environmental issues, which must be integrated with the list of governance procedures and measures. These principles are then part of the measures for risk control and management of Brazilian financial institutions.
In other words, institutions authorized to operate by the Brazilian Central Bank are added to the chain of liability with regard to damages and impacts in the form of degradation — irrespective of the level and quality of the social and environmental relationships — caused by the economic activity.
The Resolution, which provides for the guidelines to be followed by the financial institutions as to establishing and implementing the Social and Environmental Responsibility Policy (PRSA), sets out "relevance-proportionality" as the standard to determine the scope and complexity the PRSA must have with regard to the financial institution.
The PRSA must be conceived and implemented in accordance with the nature of the institution, the complexity of its activities and the products and services offered to the market.. In addition, the PRSA must be applied in accordance with the level of exposure to social and environmental risk. Once these are taken into account as objective criteria to define the depth and scope of the PRSA in the activities of each financial institution, the teleological purpose of the PRSA's conception as an instrument to assess and control the social and environmental risk will be ensured.
The Resolution establishes that the PRSA will have principles and guidelines that will guide the strategic actions of the financial institution as it concludes business deals and establishes relationships with clients and users of its products and services. In this process, the Resolution provides that the institution must encourage the effective involvement of the interested parties in the development of the PRSA itself. In practice, the purposes of the PRSA, as developed by the institution, should be synchronized with the real needs, concerns and interests of the market and society. That synchronization should be constantly monitored as a way of measuring the level of effectiveness of the actions established in the PRSA.
As the PRSA is developed and implemented, it must be revised and have its adequacy revaluated every 15 days, with full involvement and coordination of the institution's management, either its executive board or board of directors, as applicable. The PRSA, as an instrument to manage the compliance of the institution's social and environmental actions, should be fully included in the governance structure so as to guarantee the effectiveness of its implementation. Further, the new Resolution determines the possibility of the financial institution establishing an advisory committee, which may have parties that are not from the institution aimed at accomplishing two of the missions provided in the institution's governance structure: monitoring and evaluating the effectiveness of the actions carried out under the PRSA.
As to the concept of social and environmental risk, the Resolution provides an approach focused on the possibility of financial losses caused to the company as a result of social and environmental damages in any level and extension. It is worth noting that the Resolution does not have any provision on the financial institution's liability for action or omission that may directly or indirectly give rise to damages. However, financial institutions often find themselves in the middle of litigations in this regard.
It seems to us that the implementation of a PRSA in line with the characteristics of the institution's activities will lead to gradual and constant reduction in the occurrence of social and environmental damages, and that alone should cause a reduction of the impacts detrimental to the institution's activities. On the other hand, the Resolution further requires the institution to ensure that the social and environmental risk is treated as an additional and considerable component in the context of the risk management matrix of the institution. With such requirement, institutions are then tied to minimum parameters to establish methods for social and environmental risk management. Thus, in addition to the clear need for increasing technical training of the ones to perform management tasks of this new risk modality, the institutions must develop routines guided by procedures systemically monitored. Such systems, applied to operations, products and services of the institution, should allow that the social and environmental risk be part of a cycle that begins with its identification and classification, according to its source, nature and dimension, which are assessed in accordance with the assessment standard defined by the institution. After measuring the social and environmental risk, the institution must monitor it and, in case it is materialized, mitigate its effects, thus ending the control cycle.
It is worth noting that the standard for assessment of the social and environmental risk must be shaped according to the damage potential of the economic activity with which the operation, the product or the financial service between the institution and the counterparty is associated. Financial institutions must define specific criteria and methods to assess the social and environmental risk of these types of financial transactions and deals, such as financing of industrial projects or infrastructure works. Once this cycle is completed, it should have its information and observation results duly registered and stored by the institution, especially any effective financial losses resulting from social and environmental damages and drawbacks.
All of these actions inherent in the management process of this type of risk and led by the governance guidelines of the institution should enable the administration to previously assess potential negative social and environmental impacts resulting from new products and services that, in a worst-case scenario, could even be detrimental to the reputation of the financial institution. The concern with recycling and update of the systematic routines is also part of the financial institution’s agenda, which should establish procedures for effective monitoring of changes in the market and in the applicable legislation and regulation.
The introduction of the PRSA currently requires institutions to define targets and actions to adjust the operating and organizational structures, their routines and procedures, following a schedule approved by the administration. By the end of implementation of all actions defined in the schedule, they must be fully integrated with the other governance policies of the financial institution, especially the risk management policy, as well as credit management and human resources policies.
Finally, it is worth mentioning that the approval of the PRSA and the action plan for its implementation, with an estimate for its implementation to begin, must take place within the period that ends on June 31, 2015, upon assignment of execution responsibility to an officer of the institution. However, this period is shorter for financial institutions subject to the internal process of determination of capital compliance, referred to in the Resolution 3988, of June 30, 2011, in its articles 4, VI, and 6. As a result, it is imperative that institutions subject to Resolution 4327/14 be fully aware of the set of rules, manuals and regulations that govern social and environmental issues in our system of laws. In this regard, we will now consider the legislation that provides for aspects connected with environment protection. This matter is provided for in Law 9605 of February 12, 1998 and in Law 6931 of August 31, 1981. Therefore, it is relevant to review them.
In addition to establishing the National Environmental Council, Law 6931/81 provides for the purpose, mechanisms and application of the National Environmental Policy (PNMA). The PNMA features systematic purposes and instruments for implementation and environment control set forth in Law 6931/81. This law provides for criminal and administrative penalties applicable to active agents and co-agents deemed responsible for conducts and activities detrimental to the environment. The range of environmental values comprised in this law is broad, and it categorizes conducts deemed threatening against the flora and fauna, urban planning and cultural heritage. Failure to comply with the environmental rules imposes on the agent three levels of liability: administrative, civil and criminal. Thus, pursuant to article 14 of Law no. 6938/1981, failure to adopt the measures necessary to protect the environment or repair the damages caused by degradation of environmental quality will subject the offenders to administrative penalties, without prejudice to criminal penalties and the obligation to repair the damage.
Even though the current legislation establishes provisions applicable to financial institutions, there is no provision that expressly holds the financer strictly liable for repair of environmental damage or environmental administrative penalty resulting from the financed undertaking or activity performed by third parties. However, under article 12 of such Law no. 6938/1981, the governmental financial institutions are required to authorize the financing of projects only upon evidence of prior environmental licensing and compliance with rules, criteria and standards set by the National Environmental Council. However, it seems possible to conclude that such institutions are not required to effectively monitor the progress of the financed project implementation.
Although there is no rule holding the financer strictly liable, there are cases of financial institutions held indirectly liable for acts that led to the occurrence of environmental damage, and they were classified as the agent that gave rise to damages to the environment. This liability of financial institutions is backed by the interpretation of the rule that the legal entity, either governed by public or private law, may be held directly or indirectly liable for activity that causes environmental degradation, under article 14 of Law no. 6938/1981.
There are precedents holding financers liable, even if indirectly, for activities that caused environmental damages. According to such precedents, we may conclude that there is the possibility of extending and applying the concept of financial institutions' liability for environmental damages as a result of commissive and omissive conduct due to failure to comply with specific regulatory obligations of the institution.
Thus, it seems to us that it is precisely because of this concept of indirect liability of the institution, either on a commissive or omissive manner, that financial institutions should devote even more attention to compliance with the rules established in Resolution 4327/14. It is considerably important that preventive measures, included in policies, routines and operating procedures of the institutions, be adjusted to reduce, even if slightly, the number of events of misconduct when granting credit and financing projects and activities with environmental damage potential..
Financial institutions will have to take basic operating precautions, which are highly relevant, in order to determine the conformity of the undertaking or activity that may pose any degree of risk of environmental degradation, so as to rule out their inclusion, as financer agents, in the chain of liability. It is lawful that financial institutions demand those that request credit and financing from them to prove they are in full environmental compliance. It is only after they prove it that the institutions will grant the requested credit or not.
The duty of diligence of the financer agent is evident, be such agent public or private, while conducting evaluation studies prior to granting the credit sought by parties which could potentially cause degradation to the environment in the performance of their financed activities. Therefore, such duty does not rely on the source of credits granted to the entrepreneur.
The social and environmental issues currently point in the sustainability direction and involve financial institutions as they conduct f transactions that may be related to economic activities that, to some extent, have environmental impact. Thus, financial institutions must constantly identify and address the risks associated with their operations. With the implementation of Resolution 4327/14 by the National Monetary Council, financial institutions are required to devote even more attention to situations that may pose a social and environmental risk, and these situations do not refer to financing only, but also to the acceptance of the corresponding guarantees.
 ISO establishes requirements for quality management systems of companies and organizations. In Brazil, the Brazilian Standards Institute [Associação Brasileira de Normas Técnicas - ABNT] prepares Brazilian versions of the most recurring ISO standards, among which is ISO 14001, whose official version in Brazil is provided by ABNT through the NBR ISO 14001. Brazilian Institute of Metrology, Standardization, and Quality Control - INMETRO, available at www.inmetro.gov.br.
 Manual of the Corporate Sustainability Index available at www.bmfbovespa.com.br.
 Said Resolution 3988 provides for the implementation, by the financial institutions authorized to operate by the Brazilian Central Bank, of a capital management structure. Art. 4, VI, establishes that such structure should provide for, among other measures, the Internal Process for Evaluation of Capital Compliance - Icaap, which must be implemented by institutions whose total assets exceed one hundred billion reais and which were authorized to use internal models of market risk, credit risk or operational risk, or which are members of a financial conglomerate whose total assets exceed one hundred billion reais and which is composed of at least one full service bank, commercial bank, investment bank, development bank, exchange bank or savings and loans bank. The credit unions, credit cooperatives, mortgage loan companies, brokerage firms, currency exchange companies, distributors, leasing companies, among others, are released from implementing such process.
 Special Appeal no. 650728 - SC, of the Second Panel of the Superior Court of Justice, reported by Justice Antônio Herman V. Benjamin, published on 12/2/2009, concludes that “In order to determine the causal connection of the environmental damage, the following parties are made equivalent: the one that does something, the one that does not do something when it should have done it, the one that fails to do it, the one that does not care that anyone does it, the one that provides financing for others to do it, and the one that benefits from what others do”.
 Conducting environmental audits of the financed activities, establishing contractual conditions for termination or penalties in case of violation of environmental standards, and implementing routines to monitor strategic projects and ensure compliance with environment-related contractual obligations are examples of measures that may set conduct guidelines for financial institutions in relation to environmental risk management.