The recent use of the Lender Liability regime in Brazil by public prosecution can bring fresh ideas for Dutch lawmakers who want tighter controls over investment in socio-environmentally sensible activities. Public prosecutors use this figure to hold entities providing financial support to socio-environmentally harmful activities co-responsible for such damages, while also imposing broad due diligence duties over financial institutions and demanding compliance and verification of the investment with socio-environmentally sensible norms.
This regime is the conjunction of legal mechanisms and principles applied within the Brazilian monetary financing system, mainly the cautionary and the polluter pays principles; the strict and shared liability regime for environmental damages; and the internalization of the Ecuador Principles by private financing entities.
The Environmental Financing Framework
A Healthy and Balanced Environment is a constitutional right, described in article 225 of the Federal Constitution. Its heading attributes public and private entities with mechanisms and duties regarding environmental management, imposing the Cautionary principle as conduct guidance.[i] The third paragraph of article 225 establishes the Polluter Pays principle, determining that those responsible for environmentally harmful activities shall be subject to criminal and administrative sanctions, and independently, the civil duty to repair damages. This principle can also be identified in other legal instruments, such as law 6.938/1981 (“National Environmental Policy”) which introduced the concepts of direct and indirect polluter.[ii] The latter figure allowing the qualification of indirect polluter for anyone who contributes and/or benefits from socio-environmental damages, depending on the degree of their participation to the result.
Assumption of foreseeable risks entices strict and shared liability to the investor, which is the imposition of liability on a party without the need to prove guilt (such as negligence or tortious intent) for any damage.[iii] On the other hand, entities that assume unforeseeable risks must prove that they diligently performed their duties and could not possibly be conscient of the risks.[iv] As national doctrine teaches “the duty to compensate is attributed to who creates the risk, even if the activity exercised was not the direct and immediate cause of the event. It is enough that the risky activity was at the occasion, a mere medium or indirect cause of the event”.[v]
The Brazilian financial framework is regulated by the Central Bank, which oversees operations of public and private institutions. Regarding Lender Liability, two of its Resolutions, namely Resolution 3.876/2010, which prohibits the concession credit to individuals or legal entities listed in the blacklist of slave-like conditions employers’ register; and Resolution 4.327/2014 which, in the light of the Ecuador Principles, demands from financial institutions adequate internal structures to evaluate socio-environmental risks exposition, identify and properly characterize risk components, taking into account affected communities’ opinions to carry investments with relevant degrees of socio-environmental risks.
With such impositions, financial institutions actively avoid the significant costs of being convicted as an indirect polluter, as they may share civil, administrative and criminal liability with the direct polluter, not to mention the grave reputational damages, otherwise. On the other hand, public powers know the importance of this tool. This was the case for the Spanish bank Santander, which in 2016 was fined for financing soybeans harvests linked with deforestation. This precedent led Labour Prosecution Offices to initiate several civil public actions towards private banks that neglected socio-environmental obligations. Most of the cases are in lower or administrative courts and shall clarify the limits of the application of Lender Liability by Brazilian higher courts as they are appealed or reviewed.
However, there is still no leading precedent in the Superior Court of Justice (“STJ”) under this setup, given its recent use. Nonetheless, several aspects subsiding a ruling like this are already established in the court jurisprudence. In a public civil action, Justice Herman Benjamin affirmed in relation to those liable for environmental damages: “equate among themselves those who do it; those who don’t do when they should; those who should do it and don’t; those who do not care if other do it; those who finance it to be done; and those who benefit when others do it”.[vi] As the STJ does not distinguish primary and secondary causes, any course of action involved with polluting practices shall be considered “indirectly polluting” if it sufficiently contributes to (or fails to impede) its results,[vii] while strict and shared liability of direct and indirect polluters is a firm precedent in the STJ at this point.[viii]
The most relevant case law on this matter in the supreme court relates to a loan from the Interamerican Development Bank to São Paulo State Revenue, which financed a project that caused environmental damages. In that case, the bank proved that it had performed its due diligence as it was misinformed of the inexistence environmental risks, evading strict and shared liability. On the other hand, further cognition of the case was not possible, since the international organization was deemed immune. This is a clear example detailing the Lending Liability regimen: the only fact that excuses the participation of an entity in a harmful activity is proof g that it fulfilled its due diligence duty, even when it could not possibly know the illegality of the investment due to fraudulent behavior of the other parties or gross and undeniable errors.
In the Brazilian system, international principles such as the cautionary principle and the polluter pays principle enabled the creation of the indirect polluter figure, with strict and shared liability imposed upon economic agents that disregarded cautionary duties and benefited or contributed for polluting or sociologically harmful activities. These cautionary obligations of financial entities, although initially designed as voluntary duties, feed information to public powers regarding the compliance with socio-environmental rules and enable more informed policies of public authorities.
These are the teachings of the tropical system as it broadly establishes liability of indirect polluters, obliging financial players to adequate their activities to the framework in order to avoid Lender Liability. This imposed rigid socio-environmental practices and controls over financial institutions, which see the cautionary approach not only as ethically sound, but as safeguards to their own investments. The Netherlands, as one of European’s financial districts may learn these lessons and, coupled with its advanced system of extraterritorial liability, play a pioneering role in the reorganization of global investment fluxes.
(Photo: Andrey Câmara)
[i] The Cautionary Principle, known as the conjunction of the Principles of Prevention and Precaution, that are also enshrined in principles 2, 15 and 17 of Rio Declaration and, in the Brazilian system, in article 225, line IV of the Federal Constitution. The principle is the idea that on the uncertainty of the safety of determined activity in relation to the environment, or on the acknowledgement of potential risks, general cautionary measures must be taken to avoid damages by private and public entities
[ii] Article 3, line IV of National Environmental Policy Law. It defines as polluter any natural or legal person responsible for activities that cause environmental degradation.
[iii] Article 927 of Federal Law 10.406/2002, the Brazilian Civil Code and article 2nd of Federal Law 9.605/1998, determines that who, in any way, contributes to the practice of the environmental crimes shall receive the sanctions in the extent of its culpability, as well as individuals from legal entities that, conscious of criminal activity of a third party, does not refrain it when able.
[iv] The idea that proper due diligence is the private entities’ mean to fulfill its duties to respect human rights was also adopted in John Gerard Ruggie, ‘Just Business: Multinational Corporations and Human Rights’ (W.W. Norton & Company, 2013), Pages 104-106
[v] Sergio Cavalieri Filho, ‘Programa de Responsabilidade Civil’ (11th Edn, Atlas, 2014), Page 184
[vi] STJ – REsp 650.728/SC (23.10.2007) – rapporteur Justice Herman Benjamin, Line 13
[vii] Édis Milaré, ‘Direito do ambiente’ (10th Edn, Revista dos Tribunais, 2015), Page 432
[viii] STJ – REsp 1.374.284/MG (27.8.2014) – rapporteur Justice Luís Felipe Salomão; and, STJ – AgRg no AgRg no AREsp 153.797/SP (5.6.2014) – rapporteur Justice Marco Buzzi