A technical analysis of the Brazilian Bill on Environmental Licensing: rising risks for the environment and for the financial system

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Do you believe environmental issues in Brazil can't get any worse? Believe me: they can.

With no intention of exhausting the topic, I share my preliminary analysis and the results of debates that I had with other experts on the weakening of environmental licensing ?in the bill recently approved in the Brazilian House of Representatives (PLC 3729/2004), currently being revised by the Senate (PLS 2159/2021). I identified 5 fundamental points that need to be changed in the Senate. There might be others not as obvious, though.

Much has been said about the creation of a sort of "self-licensing". In reality, this is a simplified modality (article 21 of the PL), named “License by Adhesion and Commitment”, in which the environmental agencies in charge of issuing the environmental permit establish in advance the conditions to be observed by enterprises in certain sectors and of a certain size (including the conditions of the permit itself), and it's the entrepreneur responsibility to present documentation demonstrating compliance with these conditions, in which case the licensing agency would only verify (including through inspections by sampling) if they are true. However, this modality has limited application, requiring that "the activity or enterprise does not have the potential to cause significant degradation of the environment", that "suppression of native vegetation does not occur" and that the characteristics of the region of implementation, the environmental impacts of that type of activity, its installation and operation conditions and the necessary environmental control measures are already known. A good example would be gas stations. I do not see how, on the other hand, it would be possible to fit industrial activities, mining or infrastructure works into such a concept. It is clear, though, that the vague wording generates legal insecurity and possibilities of judicial battles about the framing (or not) of a project or enterprise into the referred concept. However, the biggest problem is not this one, but the fact that article 11 of the bill creates an exception to the concept above, establishing that the "environmental licensing of services and works directed to the expansion of capacity and paving in pre-existing facilities or roads in public domain ?will be through the issuance of the License by Adhesion and Commitment". Note that the wording does not refer to any quantitative or qualitative limits for such expansion, even allowing that, in bad faith, the environmental permit is required and issued for an unpaved road in the middle of the jungle, so that later, by way of "expansion" and "paving", a big highway is built in a region full of rare biodiversity, indigenous lands, etc. Or that a small hydro powerplant be licensed and then the capacity of this plant is multiplied by ten, transforming it into a large hydro powerplant that will flood areas of big environmental value or affect communities that may even need to be displaced, without an adequate Environmental Impact Study, a caution that does not exist in case of the License by Adhesion and Commitment. The provision is clearly unconstitutional, since article 225, IV, of the Brazilian Federal Constitution determines that public authorities are responsible for "IV - requiring, in the form of the law, for the installation of works or activities with the potential to cause significant degradation of the environment, a prior environmental impact study, to which publicity will be given”. The law cannot establish an "exception" to this rule, as this is a violation of the constitutional text, which is superior to it.

The second absolutely worrying point is the provision that the bodies in charge of protecting conservation units, cultural heritage, indigenous lands and “quilombolas” (freed slave descendants communities) territories will only be heard in a non-binding manner (article 38) and the provision of article 39, I, that, in the case of indigenous lands, only those whose process of recognition was finalized ??will be considered (which excludes hundreds of indigenous lands in process of recognition in Brazilian territory, what can be confirmed by simply consulting the FUNAI website, which shows the locations of all of them and the stage of the process) and the same for quilombolas communities lands, disregarding that only a few more than 30 areas have already been definitely recognized by INCRA throughout the country, with more than 1500 processes underway (by the way, totally paralyzed under the current federal government, violating the obligation stipulated by article 68 of the Transitory Constitutional Dispositions Act to carry out the recognition of these lands). Even more serious is the decision that, after a period of 90 days for manifestation of these agencies, there will be tacit consent, when the Federal Administration does not provide them enough personnel and budget for the exercise of their functions.

A third worrisome (and unconstitutional) point is the provision in article 10 of the Bill whereby, in the licensing of sanitation infrastructure, as a rule, an Environmental Impact Study is not required. ?Actually, as pointed out by the civil and sanitary engineer Gilberto do Nascimento (a specialist on he matter throughout his career at Caixa Econ?mica Federal), a Sewage Treatment Plant (ETE), for instance, has the potential to cause, among other impacts: a) accidental release of pollutant organic load in receiving water bodies (rivers, beaches, etc.), with consequences for flora and fauna, the economy and tourism in the entire downstream region; such region needs to be previously known and preventive and mitigatory measures must be defined in case of accidents; b) emission of odors and aerosols into the atmosphere, with risk of long distance diffusion, depending on the winds, humidity, temperature, etc. Several cases of this kind are known in Brazil, with impacts on public health and real estate devaluation. Prior studies should include the identification of techniques to prevent and address these impacts.

A fourth extremely worrying point is the provision in article 13 of the bill that the indirect or cumulative environmental impacts at the site of the operations to be licensed should not be considered in the definition of the conditions of the environmental license. It is as if the one who will put the last drop in the glass (nature) that will spill, exceeding its capacity to absorb negative impacts, could not be "held responsible" for all the "previous drops"? Actually, this is exactly the purpose of environmental licensing: to identify if (and to which extent) the site of the enterprise still supports new negative environmental impacts, without threats to human health or too serious and irreversible damages to the environment – in short, to avoid the last drop! If the answer (to the question of nature limits) is negative, the entrepreneur should develop his activity elsewhere - if cumulative impacts are not considered, the licensing is almost unuseful, unless the licensed activity is the first to have negative environmental impacts at the site. Furthermore, indirect impacts must also be considered, once many economic activities (such as mining, powerplants, etc) end up leading to further linked activities, causing deforestation or other type of environmental degradation in areas that were previously (almost) intact.

The fifth and last point of concern is the provision of article 54, which addresses ?the liability of financial institutions for damages caused by financed activities. The motivation is legitimate, since financial institutions can currently be framed, under the terms of article 3, IV, Law 6.938/81, in the concept of indirect polluter and to be held jointly liable (that is, even before the direct polluter) for environmental damages caused by financed activities, regardless of their efforts to avoid environmental damages (making a strict environmental risk assessment of companies in their portfolios) and regardless of their compliance with all applicable legal rules and internal regulations (strict liability). However, the very narrow definition of subjective liability contained in article 54 gives the impression that it is enough for the financial institution to verify if the enterprise has an environmental permit. In other words, if it does not even verify if the enterprise has investigations for environmental violations either in environmental agencies ?or Public Prosecutor's Offices, or lawsuits in environmental matters, if it does not comply with its own rules regarding its Socio-environmental Responsibility Policy (CMN Resolution 4327/2014 requires that they have an environmental and social risk management system) or the rules/standards to which it voluntarily adhered in this area (such as the Principles for Responsible Banking, or FEBRABAN's Self-Regulation Standard 14/2014, revised in December 2020), even so, it is still not liable, even partially, and on a subsidiary basis (that is, when the direct polluter does not pay), for its lack of diligence and omission. It is evident that what is proposed is another extreme, if compared to the exaggeration of strict liability - and equally inadequate. I have already addressed the topic in a scientific article published in the Journal Veredas do Direito, in 2018 , and in chapter 9 of my work "Financial System and Sustainable Development", both results of my Post-Doctoral research at USP. Financial institutions can do much more than that - and, as a rule, in fact, they already do, but those that do not, and should do so, do need to be held accountable, including in the civil sphere. If diligent financial institutions defend this rule as it stands, it even harms their credibility, because they are perfectly aware that it is possible and necessary to go much further.

Moreover, it is worth remembering that at this point we should be including climate risks assessment in the environmental licensing process and the bill does not bring a single word on that regard.

These are the points that seemed fundamental to me. It is also worth to mention that the trend to loosen environmental regulations brought by this bill goes in the opposite direction of global trends on the matter… including financial regulations! In Brazil the banking regulations on environmental, social and climate risks have recently become deeper and broader , but banks cannot replace environmental agencies in their work – they are users of information provided by them. Less strict regulations and less enforcement (as it’s also happening in Brazil right now) of course mean higher environmental risks for any banks and investores operating in the Brazilian market.

The Brazilian Senate can and should make changes to the bill. Even if it does not, the Federal Supreme Court will certainly recognize the unconstitutionality of several of its provisions, such as articles 11 and 13 mentioned above. I think we don't need to take the hard way. A technical and rational debate needs to prevail.