Abstract
This essay explores the Brazilian Resolution CMN 4,945 of 2021 on the ‘Social, Environmental, and Climate Responsibility Policy’ (PRSAC Resolution), analyzing how regulatory initiatives can enhance the financial sector’s contributions to sustainability while incorporating justice dimensions. By examining the PRSAC Resolution through the lenses of distributional, restorative, procedural, and recognition justice, this study identifies significant regulatory advancements in fostering sustainability, such as defining positive social, environmental, and climate-related actions, strengthening governance duties, and improving public disclosure requirements. However, areas for improvement remain, including the need for the Central Bank of Brazil (BCB) to conduct regulatory impact assessments, include vulnerable communities explicitly within the resolution’s framework, mandate stakeholder engagement in decision-making processes, and develop a comprehensive Brazilian Sustainable Taxonomy to prevent greenwashing and enhance transparency.
Keywords: Sustainability; Just Transition; Social, Environmental and Climate Responsibility Policy; Financial Regulation
1. Introduction
Climate change and efforts to reach net zero emissions by 2050[1] (i.e. reducing carbon emissions to levels nature can absorb) present risks and opportunities for the financial sector. On the risk side, it increases the likelihood of financial losses, like credit defaults from severe weather events, which could affect financial stability. On the opportunities side, it presents prospects for the sector’s positive contribution, such as financing the transition to net zero.[2]
Recognizing the possible adverse consequences of climate action, which may lead to unfair redistributions of benefits and burdens among societies, there is a growing debate on ensuring justice in the transition to net zero, especially for vulnerable communities.[3] Therefore, climate policies, including financial regulations, should address sustainability holistically, covering social aspects and broader environmental protection, beyond climate alone.[4]
This essay addresses the side of opportunities, exploring how regulations can foster the financial sector’s contribution to sustainability while incorporating justice concerns.
Section 2 outlines justice dimensions: distributional, restorative, procedural[5], and recognition.[6] Section 3 analyzes the Brazilian Resolution CMN 4,945 of 2021 on ‘Social, Environmental, and Climate Responsibility Policy’ (PRSAC Resolution), aiming to identify justice dimensions within its provisions and suggest improvements. This is made under the acknowledgment that there are limitations for the Central Bank of Brazil (BCB) in promoting justice, as actions on this issue are mainly restricted to its legal mandate, which includes fostering financial stability.[7] Section 4 concludes, summarizing key findings.
2. Justice in the transition towards net zero emissions
Broadly, a ‘just transition’ refers to achieving net zero emissions by 2050 through a fair, transparent, and equitable process, that takes into account global concerns such as ethnicity, income, and gender.[8] This concept is based on the recognition that global climate actions, while essential and urgent, can materially affect specific communities, disrupt production and change consumption patterns.[9] For instance, policies to reach net zero emissions may require increased taxes on carbon-intensive industries, which could lead to higher prices for related goods, disproportionately impacting low-income households and poorer nations.[10]
Moreover, the impacts of climate change exacerbate existing social inequalities. This is because climate change affects individuals already at risk, as approximately 3.3 to 3.6 billion people live in contexts highly susceptible to climate events.[11] For instance, populations displaced by rising sea levels are often those who have considerable development constraints (with lower resources to recover from extreme events) and who have historically contributed the least to global warming and climate change.[12]
Thus, addressing this global challenge requires a holistic approach that goes beyond reducing carbon emissions to encompass broader sustainability areas, under justice concerns. This include the consideration of social issues like promoting inclusion[13], alongside broader environmental protection, as the impacts of climate change can amplify ecological destruction, such as losses on biodiversity.[14]
This essay employs four justice dimensions in the transition towards net zero emissions. The first is distributional justice[15], which focuses on ensuring fairness and equality in how the benefits and burdens of the transition are shared, aiming to address imbalances in resource allocation, impacts, and opportunities across society.
The second is restorative justice[16], which seeks to repair harm caused to individuals, communities, and the environment. It aims to recongize historical responsibility for damages while implementing measures to prevent future injustices.
The third is procedural justice[17], which emphasizes fair and transparent decision-making processes related to climate action. This includes active stakeholder engagement in these processes, with proper accountability, as well as the promotion of mechanisms for capacity-building and knowledge-sharing.
The fourth is recognition justice[18], which involves acknowledging and respecting the identities, cultures, and needs of individuals and communities. This is particularly important for vulnerable groups, ensuring that they are treated with dignity and have equal rights throughout the transition to net zero emissions.
3. The PRSAC Resolution and dimensions of justice
In 2020, the BCB integrated a ‘Sustainability’ pillar into its strategic agenda (known as ‘Agenda BC#’), encompassing various areas under its mandate, including prudential regulation for financial stability.[19] The actions recognize both the risks and positive impacts associated with sustainability in the financial sector, echoing to some extent the ‘double materiality’ approach promoted by the European Commission.[20]
The risk perspective focuses on how social, environmental, and climate events can negatively affect financial institutions’ balance sheets, particularly through their impact on traditional financial risks, such as credit, market, liquidity, and operational risks. To address this, the BCB has enhanced rules on the integrated risk management structures that financial institutions must implement. These rules help institutions be better equipped to identify, assess, evaluate, control, and mitigate potential losses from social, environmental, and climate-related events.[21] Additionally, the BCB enforced disclosure rules to ensure greater transparency to the public, promoting market awareness and discipline.[22]
The second perspective considers how financial institutions can positively impact sustainability. To address this, the BCB issued regulations requiring institutions to establish a ‘Social, Environmental, and Climate Responsibility Policy’[23]. These rules, consolidated in the PRSAC Resolution, are the focus of this essay.
Article 3 of the PRSAC Resolution defines the ‘Social, Environmental, and Climate Responsibility Policy’ as a ‘set of principles and guidelines on social issues, environmental issues, and climate-related issues to be observed by the institution in its business, activities, and processes, as well as in its relationship with stakeholders.’ For these purposes, stakeholders include (Article 3, paragraph 1, item IV) ‘clients and users of the institution’s products and services, the institution’s internal community, suppliers and providers of relevant outsourced services, investors in bonds or securities issued by the institution, as well as other interested parties impacted by the institution’s products, services and activities, according to criteria established by the institution itself’ (Article 3, paragraph 1, item IV). In addition to establishing this policy, the institution must ‘implement actions aimed at its effectiveness’ (Article 2).
It is important to note that these two perspectives (risks and positive impacts) complement each other in promoting financial stability.[24] The ‘Social, Environmental, and Climate Responsibility Policy’ (positive impacts) is seen by the BCB as a mechanism for institutions to align their strategies with a sustainable economy, thereby mitigating reputational and strategic risks, particularly in the long term.[25]
3.1. Distributional, restorative, and recognition justice
The PRSAC Resolution succeeds in addressing sustainability in its broader sense, incorporating the social, environmental, and climate ‘triad’[26], as referenced by the BCB. It provides separate definitions for each component. However, while the rationale behind the ‘triad’ suggests that the regulator intends to treat these three components not only individually but also in an interconnected manner, the PRSAC Resolution does not explicitly mention or explain how this integration occurs.
To address this gap, the PRSAC Resolution could have followed a structure similar to that of Brazilian Resolution CMN 4,557, of 2017, which deals with the perspective of risks and the possibility of financial losses. This latter resolution defines social, environmental, and climate-related risks independently (Articles 38-A, 38-B, 38-C), while also articulating their interconnection (Article 6, paragraph 1), stating that ‘risk management must be integrated across risks, enabling the identification, measurement, evaluation, monitoring, reporting, control, and mitigation of adverse effects arising from interactions between them’.
The PRSAC Resolution (Article 3, paragraph 1, items 1 and 2) defines social issues as ‘the respect, protection, and promotion of fundamental rights and guarantees, and common interest’, where common interest is defined as ‘the interest associated with a group of persons legally or factually connected for the same cause or circumstance’. This aligns with the 1988 Brazilian Constitution (Title II – Fundamental rights and guarantees), which encompasses a wide array of individual and social rights, including, but not limited to, the right to life, liberty, and equality, as well as nationality and political rights. By framing the social component around ‘respect’, ‘protection’, and ‘promotion’, the PRSAC Resolution promotes recognition justice, requiring financial institutions to acknowledge and respect these rights in their business activities and stakeholder relationships.
Environmental issues, according to the PRSAC Resolution (Article 3, paragraph 1, item 3), involve ‘the preservation and restoration of the environment, including its recovery when it is possible’. This represents restorative justice, by addressing past harm and preventing future damage. Climate-related issues, defined by the PRSAC Resolution (Article 3, paragraph 1, item IV), relate to the institution’s positive contribution ‘to the adjustment towards a low-carbon economy’, and ‘to the reduction, when possible, of impacts arising from frequent and severe meteorological conditions or long-term environmental shifts’. Although the resolution does not specifically mention mitigating adverse impacts from the net-zero emissions process, it emphasizes reducing impacts from severe climate events, aligning with both restorative justice and distributional justice, by correcting the imbalances caused by global warming.
In terms of distributional justice, the compliance costs of the PRSAC Resolution must be considered. The PRSAC Resolution (Article 2) specifies that the responsibility policy must be ‘proportional to the business model, nature of operations and complexity of the institution’s products, services, activities and processes.’ Furthermore, in establishing minimum governance obligations (Articles 5 to 9), the PRSAC Resolution mandates the creation of a responsibility committee only for larger and more complex institutions within the Brazilian Financial System. This reflects an intention to reduce compliance costs for smaller and simpler institutions. However, the BCB should have provided a regulatory impact assessment to clarify these costs in more detail.
Finally, the PRSAC Resolution could have strengthened its approach to distributional, restorative, and recognition justice by explicitly mentioning vulnerable communities within the sustainability ‘triad’ definitions. In comparison, Brazilian Resolution CMN 4,557 on risk management includes a list of risk events that could result in losses for a financial institution, such as when its counterparty is involved in ‘irregular, illegal or criminal act that impacts traditional peoples or communities, among them indigenous groups and quilombolas[27], including the invasion or irregular, illegal or criminal exploitation of their lands’ (Article 38-A, paragraph 2, item VI). By integrating explicit references to vulnerable communities, the PRSAC Resolution would further reinforce the financial institutions’ positive contribution to their welfare, particularly in alignment with recognition justice.
3.2. Procedural justice
3.2.1. Procedural justice in the PRSAC Resolution
The PRSAC Resolution (Article 10, items I and II) requires financial institutions to publicly disclose their ‘Social, Environmental, and Climate Responsibility Policy’, along with the actions taken to ensure its effectiveness and the criteria used for its evaluation. Transparency regarding the composition of the responsibility committee is also mandatory (Article 6, paragraph 2). However, disclosure of the evaluation of actions related to the policy’s effectiveness is optional (Article 10, items IV). Additionally, certain elements only need to be disclosed if implemented by the institution (Article 10, item III). In other words, the implementation of these elements is not mandatory. This applies to economic sectors subject to restrictions, any national or international agreements the institution has entered into, and the mechanisms for stakeholders’ engagement in the decision-making process.
The regulator’s emphasis on procedural justice is clear in its push for transparency, which allows society to compare initiatives across institutions. This approach encourages institutions to proactively engage and continuously improve their responsibility policies by leveraging industry benchmarks. Furthermore, it serves as a tool for holding institutions accountable, at least from a reputational standpoint (which also ties into restorative justice). However, the PRSAC Resolution’s effectiveness in mandating stakeholder inclusion in decision-making processes is limited, as participation is left to each institution’s discretion.
3.2.2. Procedural justice within the BCB’s regulatory process, and the sustainable taxonomy
In terms of procedural justice beyond the PRSAC Resolution’s enactment, the BCB’s progress reports[28] on deliverables under the ‘Sustainability’ pillar in its agenda enhance public transparency. Additionally, the draft PRSAC Resolution went through a public consultation process[29], with the BCB facilitating debates with the financial sector, government, non-government entities, and academia.
Despite the BCB’s assertion[30] that it incorporated public consultation feedback into the final version of the PRSAC Resolution, with examples of changes (such as in the definitions and the implementation timeline), details regarding each contribution, its outcome, and the rationale behind it remain undisclosed.
Finally, regarding the financial sector’s positive impact on sustainability, particularly through investment decisions, it is important to note that the Brazilian Decree 11,961 of 2024 established a committee of 27 government entities tasked with coordinating and implementing a Brazilian Sustainable Taxonomy, of which the BCB is a part. According to Article 1, sole paragraph, the Brazilian Sustainable Taxonomy ‘consists of a classification system for activities, assets, or categories of projects that contribute to achieving climate, environmental, and social objectives through specific criteria.’
The development of such a taxonomy in Brazil is crucial for establishing a shared understanding of economic sectors and activities considered sustainable. The Brazilian initiative has the potential to enhance procedural justice by providing transparency and credibility within sustainable markets, giving investors, including financial institutions, access to reliable and comprehensive information for making informed decisions. Furthermore, the Brazilian Sustainable Taxonomy can help mitigate the risk of ‘greenwashing’, where entities falsely present themselves as being more sustainable than they are.[31] In the context of investment decisions, ‘greenwashing’ occurs when financial instruments are inaccurately labeled as ‘green’, leading investors to allocate funds based on misleading information.
4. Conclusion
This essay underscores the critical role that financial regulations play in integrating justice dimensions (distributional, restorative, procedural, and recognition justice) into a broader approach to sustainability during the transition to net zero emissions. By ensuring that financial regulations address these dimensions, the transition can be made more equitable and just, especially for vulnerable communities.
The analysis of the Brazilian PRSAC Resolution highlights its significance as a regulatory milestone. By requiring financial institutions to implement a ‘Social, Environmental, and Climate Responsibility Policy,’ the PRSAC Resolution fosters the financial sector’s positive contributions to sustainability. It defines social, environmental, and climate-related issues in a structured manner and establishes robust requirements for public disclosure and governance accountability.
However, while the PRSAC Resolution presents notable progress, there are areas for improvement. One critical recommendation is that the BCB should conduct a regulatory impact assessment to offer a clearer understanding of the compliance costs associated with its provisions. Additionally, enhancing the clarity on how social, environmental, and climate-related issues are interconnected would strengthen the resolution’s ability to address sustainability holistically. Explicitly including vulnerable communities within the sustainability ‘triad’ would further align the resolution with recognition justice.
Moreover, making stakeholder engagement in decision-making processes mandatory, rather than optional, would enhance procedural justice by ensuring more consistent practices across financial institutions. This step would also address distributional justice concerns by giving all stakeholders a voice in shaping institutional policies that affect them. Finally, the development of a Brazilian Sustainable Taxonomy is essential to enhance transparency and prevent greenwashing, ensuring that financial institutions, as investors, can make informed decisions based on credible sustainability information.
In conclusion, while the PRSAC Resolution has advanced the integration of sustainability into financial regulation, these enhancements are necessary to ensure that it fully addresses the justice dimensions and supports a fairer transition toward a sustainable economy.
[1] ‘Net Zero Coalition’ (United Nations) <https://www.un.org/en/climatechange/net-zero-coalition> accessed 5 April 2024.
[2] Task Force on Climate-Related Financial Disclosure, ‘Recommendations of the Task Force on Climate-Related Financial Disclosures’ (2017) <https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf> accessed 5 April 2024. 5-6.
[3] Patrick Bolton and others, The Green Swan: Central Banking and Financial Stability in the Age of Climate Change (Bank for International Settlements 2020). 15-16.
[4] ‘Overview of Sustainable Finance’ (European Commission) <https://finance.ec.europa.eu/sustainable-finance/overview-sustainable-finance_en> accessed 21 March 2024.
[5] Darren McCauley and Raphael Heffron, ‘Just Transition: Integrating Climate, Energy and Environmental Justice’ (2018) 119 Energy Policy 1.
[6] Kirsten Jenkins and others, ‘Energy Justice: A Conceptual Review’ (2016) 11 Energy Research & Social Science 174.
[7] Brazil. Complementary Law 179 of 24 February 2021.
[8] Darren (n 5).
[9] Patrick (n 3) 15.
[10] Claus Brand and others, ‘The Macroeconomic Implications of the Transition to a Low-Carbon Economy’ <https://www.ecb.europa.eu/press/economic-bulletin/articles/2023/html/ecb.ebart202305_01~a6ff071a65.en.html> accessed 5 April 2024.
[11] Intergovernmental Panel on Climate Change, ‘Climate Change 2023: Synthesis Report – Summary for Policymakers.’ (First, 2023) 5.
[12] Intergovernmental Panel on Climate Change (n 14) and ‘What Is Climate Change?’ (United Nations) <https://www.un.org/en/climatechange/what-is-climate-change> accessed 26 April 2024.
[13] Intergovernmental Panel on Climate Change (n 14) 31.
[14] European Commission (n 4).
[15] Darren (n 5).
[16] Darren (n 5).
[17] Darren (n 5).
[18] Kirsten (n 6).
[19] ‘Sustainability’ (Central Bank of Brazil) <https://www.bcb.gov.br/en/financialstability/sustainability> accessed 10 April 2024.
[20] The double materiality refers not only to how climate-related issues affect firms financially but also to how these firms impact climate-related issues. See more in: ‘Guidelines on Reporting Climate-Related Information’ (European Commission 2019) <https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf> accessed 1 April 2024.
[21] Central Bank of Brazil, ‘New Regulation on Risk Management and Social, Environmental and Climate Responsibility’ (Central Bank of Brazil 2021) <https://www.bcb.gov.br/content/about/legislation_norms_docs/BCB_Risk%20management%20and%20social%20environmental%20and%20climate%20responsibility.pdf> accessed 18 May 2024.
[22] ‘New Regulation on Social, Environmental, and Climate-Related Risk Disclosures’ (Central Bank of Brazil 2021) <https://www.bcb.gov.br/content/about/legislation_norms_docs/BCB_Disclosure-GRSAC-Report.pdf> accessed 19 April 2024.
[23] Central Bank of Brazil (n 18)
[24] Veerle Colaert, ‘The Changing Nature of Financial Regulation: Sustainable Finance as a New EU Policy Objective’ (2022) 59 Common Market Law Review 1669.
[25] Central Bank of Brazil, ‘Voto CMN 70 of 26 August 2021’ <https://normativos.bcb.gov.br/Votos/CMN/202170/VOTO_DO_CMN_70_2021_BCB_SECRE_Numerado_Manualmente_01.pdf> accessed 2 April 2024.
[26] Central Bank of Brazil (n 18).
[27] Quilombolas are people who escaped slavery. See more in: ‘Their Identity Was Forged through Resistance: Inside the Lives of Brazil’s Quilombos’ (National Geographic) <https://www.nationalgeographic.com/history/article/their-identity-was-forged-through-resistance-inside-the-lives-of-brazils-quilombos> accessed 19 May 2024.
[28] ‘Report on Social, Environmental and Climate-Related Risks and Opportunities’ (Central Bank of Brazil) <https://www.bcb.gov.br/en/publications/report-risk-opportunity> accessed 19 May 2024.
[29] Central Bank of Brazil (n 22).
[30] Central Bank of Brazil (n 22).
[31] ‘Greenwashing – the Deceptive Tactics behind Environmental Claims’ (United Nations)
<https://www.un.org/en/climatechange/science/climate-issues/greenwashing> accessed 26 April 2024.
