MONTH INTERVIEW – Ana Luci Grizzi: “Financing is an instrument of environmental control”

10/7/2020

It is necessary to ensure that the financial system in the country evaluates the assets to which the financial resources are being directed, in order to ensure that the projects are in accordance with environmental standards, highlights the lawyer, who is a partner at the Veirano Law Office.

By Soraia Duarte

Despite her 20 years of experience in Environmental Law, an area in which she earned a Master’s degree from the Pontifical Catholic University of São Paulo (PUC-SP), lawyer Ana Luci Grizzi never imagined seeing presidents of large banks making public commitments related to the adoption of socio-environmental criteria in the release of financing, as has happened in recent months. “Seeing the effectiveness of environmental standards being adopted by the private sector, by banks, was my consumer’s dream,” she stresses. Issues related to the environment, she notes, have been gaining space on the discussion agenda. However, making this movement into concrete reality requires effective advances in the environmental and climate criteria that are adopted by financial institutions in evaluating their investments.

In this interview with Instituto Escolhas, Ana Luci analyzes the international discussions on this topic and how Brazil has followed this trend. She also comments on the proposal for regulating environmental and climate risks within the scope of the local financial system, in which she has been collaborating with Instituto Escolhas.

In the podcast Escolhas on the Air, episode # 13, the lawyer goes into more detail on the role of the financial system as an inducer of good environmental practices. Listen on Spotify and Soundcloud.

Instituto Escolhas – How are the world’s main banks, especially American and European ones, discussing the adoption of environmental and climate criteria in the evaluation of investments?

Ana Luci Grizzi – Currently, there are discussions regarding the adoption of information disclosure standards, exclusively on whether or not to adopt the disclosure criteria of the TCFD (Task Force for Climate-Related Financial Disclosures), which focuses exclusively on greenhouse gas emission data. As far as I know, there is no international discussion regarding a broad standard, covering other environmental issues, nor about the socio-environmental responsibility of banks. On the other hand, we have the report on financial climate risks, prepared in 2019 and released last September by the Network for Greening the Financial System, a global network of central banks. This document provides an assessment of environmental risks within the financial system as a whole, with a vision of stabilizing macroeconomics and financial stability, covering monetary policies and macro scenarios, among other topics. But that’s the only publication.

Choices – How is Brazil and our financial system getting involved in these discussions? Is the practice of adopting standards for disclosure also observed here?

Ana Luci – This discussion here in Brazil is very recent. It practically starts when the Central Bank includes sustainability in its agenda, which occurred at the beginning of September. That was the first time that we had an official communication to talk about adopting standards for disclosure. Some large banks have already discussed this and have even been adopting TCFD standards. But we are talking about voluntary disclosure, which allows us to separate what I want to disclose from what I don’t. So we are unable to measure the scope and validation of this information.

Choices – The discussion seems outdated when we look at what has been happening in other countries …

Ana Luci – In my opinion, there is a reason: we do not have an efficient command and control system. This is different, for example, from the United States. There, in the late 1990s, there were many discussions about the responsibilities of banks in relation to contaminated areas that were bought and resold, or that were placed in guarantee. In the beginning, banks were being held responsible for these areas, but there was an evolution. If the bank is held accountable, the risk rating increases and influences the stability of the financial system, and that is not what you want. They managed to go on bit by bit, setting conditions and removing the responsibility of the banks. It was an evolution. It was possible because over there, the command and control system does work. That’s different from here. We have environmental standards, but also environmental agencies that are deficient in infrastructure and personnel, as well as ineffective environmental public governance. So, when discussing whether a bank should be held responsible for the liabilities generated by the operations it financed and in which it holds assets, we have a bigger problem, because we have no one to solve these liabilities. Our command and control system is flawed. We need to take actions that are not common in countries where this system works. This is worse for financial activity, because banks will have to take other actions, of environmental diligence [investigation and assessment of existing environmental restrictions, identifying the feasibility of a given enterprise in the intended location], that are, for example, different from those taken out there.

Escolhas – In this international debate, is the argument being put forth that rules that may be adopted must be mandatory, determined by the regulators, or would they be adopted on a voluntary basis?

Ana Luci – Yes, this discussion is taking place globally, and it gained momentum with discussions about ESG criteria. The debate covers the need to make the TCFD disclosure standards mandatory and whether the adoption of these criteria should be expanded, covering all environmental issues that fall within the “E” (for “environment”), going beyond climate change.

Choices – Have we made any concrete progress?

Ana Luci – Earlier this year, the German CVM [an entity similar to the Brazilian Securities and Exchange Commission] released a broader report covering all ESG matters, how to assess environmental criteria, and the disclosure of information by public companies. If disclosure is voluntary and unregulated, you can publish what you want, however you want. The discussion exists because there is a lack of comparative basis and transparency. The data needs to be comparable with that of other companies, contributing to investment decision-making. That is why the European Union, for example, discusses taxonomy [the mandatory disclosure of information on environmental sustainability criteria].

Choices – And in Brazil? Is there any movement in this direction?

Ana Luci – Brazil is outside this. CVM has said that the market is regulated. I understand their position, including because we still have no international definition. Therefore all we have with respect to the disclosure of environmental information by Brazilian publicly-held companies is non-validated information. They can inform what they want, however they want. We have no one to carry out the validation. Socio-environmental information is not always transparent, nor does it always show investors the risks and benefits of the business. We should be in a moment of opening data, which is what the investor needs in order to make an investment decision.

Choices – We have a Central Bank resolution that addresses the social and environmental responsibility of financial institutions. What is your assessment of the effectiveness of this standard?

Ana Luci – Resolution 4327 is what we call a programmatic standard. It proposes the construction of a policy and a corporate governance within the banks and institutions that are authorized to operate by Bacen [Central Bank], so that they begin to assess socio-environmental risk.  Given the original goal, it fulfills that purpose. Socio-environmental risk is now mandatorily included in a bank’s governance and as an issue to be evaluated. But the standard only says that it is necessary to evaluate. It  remains very timid regarding the actions that the bank must take in order to verify the environmental compliance of the projects in which it is involved. Thus, it is a standard that did not generate much practical results. The big banks were already used to doing some risk assessment, depending on the project and the amounts. But this assessment does not apply to all bank operations, since it is not provided for in the resolution.

Escolhas – Do you believe that this resolution needs to be updated, due to the intense debate about banks being more active in choosing investments?

Ana Luci – As far as information from the Central Bank is concerned, there will be a review. We do not yet know its scope–but, in my assessment, it is necessary to ensure that the country’s financing system–and banks are big players in this–is responsible enough to assess where the money will be allocated, in order to ensure that projects comply with environmental standards. Banks need to take certain actions that are under due diligence–to use a term from corporate governance–before they can actually make the contributions. Yes, you have to have a control system, because it is through financing that economic activity is stimulated. Financing is an instrument of environmental control.

 Choices – Working with Instituto Escolhas, you are preparing a proposal to regulate environmental and climatic risks within the scope of our financial system. What does this initiative entail?

Ana Luci – This regulation proposal is a second step for Central Bank Resolution 4327, which set our environmental governance and included the management of socio-environmental risk within the financial institutions that are authorized to operate by the autarchy. Now, it is necessary to make risk management actions effective. At first, we are redefining what socio-environmental risk really is and proposing a risk matrix, so that banks are able to valuate assets–a valuation that is not carried out today. It is an improvement on what we have, in which environmental risk has voluntary and varied definitions. Thus, we expanded the concept, encompassing everything that is regulated by environmental law in Brazil. If something is regulated and the rules are violated, it is an environmental risk. With or without actual damage, there is a concrete violation.

Choices – Can you tell us about what is being considered in this proposal and its main innovations?

Ana Luci – Since this standard focuses on greenhouse gas emissions, we will suggest that other standards be adopted so that more issues related to the environment are covered. For us, the most important thing is not the bank’s activity itself, but rather the projects in which it gets involved, the financing it will provide, so that the borrowers–financing or investment–comply with environmental standards.

Choices – What are the next steps in this project?

Ana Luci – Since the Central Bank’s announcement came in the middle of the project–and at a very opportune moment–our next steps involve conversations with the municipality. In its statement, the Central Bank said that it will submit a norm to public consultation. We are going to present our regulation proposal, suggesting that it be worked on as a starting point by the government. We will also disclose project information through an initial seminar, held as a webinar, to discuss this with people from the area and to promote specific conversations about environmental risk with financial institutions.

 

Escolhas – Also in collaboration with Instituto Escolhas, you are preparing a proposal so that investments in gold can have their certified origin, in order to ensure that they are not of illegal origin, which ends up happening when the extraction is carried out illegal mining in the Amazon. Can you tell us what will be proposed and for whom this proposal is intended?

Ana Luci – It is the same context of risk assessment, but at the origin. When we discuss product origin, it is easier to associate it with consumer goods. But I have to make these assessments for all the items I buy, including financial products, financial assets or securities. Today, there are no mechanisms in place to confirm the origin of gold, which allows the environmental anchor of legal compliance to be verified. We may be talking about something related to illegal mining, which harms all national economic activity and damages our image abroad, giving rise to other questions that may impact the trade balance. In this context, which is precisely the environmental risk assessment of the business, gold caught the attention of Instituto Escolhas. The idea is to present two types of standard. Since the mineral is classified in the market as a financial asset and security, we will work with the Central Bank and CVM. The purpose of the discussion is for gold to enter the system, to be traded, with a legal compliance process that ensures that it originates from areas with mining concessions or permissions and environmental licensing.

Choices – You mentioned the impact of environmental risk assessment on the trade balance. One way that Brazil has sought to increase the country’s exposure to international trade is to become a member of the Organization for Economic Cooperation and Development (OECD). Is our environmental standards agenda in line with the instruments adopted by the OECD?

Ana Luci – Being a member of the OECD is a fantastic opportunity for our country. The OECD gathers, if I’m not mistaken, more than 80% of the world’s GDP. When we joined it as a member and no longer as a participant, we became part of the decisions more effectively and adhered to all OECD legal instruments, which are directives that can help us in everything we still need to do as a developing country, and that drive the opening of the economy. What remains for the OECD to accept our bid for membership is not harmonization of standards.  In environmental matters, for example, our system is 95% harmonized. A single change, a minimal adjustment must be made on a specific issue regarding waste. What we need is to ensure that our legal system is effective. As I said earlier, if I have an ineffective command and control system, I am not actually implementing the standards, and the OECD demands that this system be effective.

Choices – You have been working with environmental law for two decades. How do you assess the development of this theme over these years?

Ana Luci – The jump, in fact, was not accomplished in 20 years, but rather starting in 2019. Before that, there was little or almost no progress made. The Brazilian environmental legal system is very good, very detailed compared to other countries, but it is also very recent. In effect, it began to become a reality, not just existing on paper, with the publication of the environmental crimes law, in 1998. Only after 2000, after the deadline for complying with the norms, did a different movement begin, which coincided with technological and technological development and with the environmental agencies understanding this new operation. It was a process of education and growth that did not mean environmental standards were effective. But the environmental risk assessment has become more and more refined and, since 2019, we have taken a leap forward in terms of understanding what the environmental variable is. We have been seeing substantive discussions on this topic. In recent months, this movement has intensified with the learning challenge triggered by the pandemic, a context that opened up the possibility for us to place the environment on the discussion agenda. Now, we see presidents of major banks going to the media and making commitments regarding granting financing to those who are not operating legally. Seeing the effectiveness of environmental standards being taken by the private sector, by banks, was my consumer’s dream, as a lawyer and as a human being.