With the surge of climate and stakeholder litigation all over the globe–comprising climate, supply chain and human rights issues–not only should governments be concerned, but mainly the private sector. It is not new that, in addition to creating stakeholder engagement and pushing forward public policies, ESG concerns pose significant reputational and financial risks, particularly to corporations. This is not only true for those companies dedicated to carbon-intensive activities or exposed to supply chain liabilities, but also to financial institutions enabling the development and expansion of such activities.
This is a particularly relevant matter in Brazil, which already relies on a well-established legal and case law framework capable of supporting sanctions and prosecution against corporations and financial institutions deemed liable in connection with environmental degradation.
In this Blog Post, we discuss the existing legal framework in Brazil with respect to environmental degradation, and how that framework might apply to the broader range of ESG issues, from climate to supply chain and human rights liability.
The cornerstone of this framework is a well-known precedent from the Brazilian Superior Court of Justice (STJ), in which the court held that any party who:
- fails to prevent, or acts with indifference to, polluting activities;
- fails to report such activities to authorities;
- finances those that carry out such activities; or
- benefits from such activities;
may be deemed to be an “indirect polluter”, thereby becoming part of the pollution chain of causality and subject to joint and several liability for environmental degradation.
This precedent has been used to support several environmental liability cases against companies indirectly tied to environmental degradation, such as those hiring service providers that end up causing environmental pollution or those that are expected not to purchase products or inputs from noncompliant suppliers. However, with the increasing focus on ESG compliance, and cases of related litigation on the rise, one can reasonably argue that this existing framework–along with attribution science when applicable, of course–can be used as grounds for cases arguing climate, supply chain and human rights liability.
Even though this potential trend is yet to effectively set foot in Brazil, there are some noteworthy precedents of Brazilian companies entangled in this relatively new type of litigation-not so much in connection with climate change, but particularly regarding human rights and supply chain liability. One clear example is the active engagement of public prosecutors and environmental agencies against companies purported to benefit from supply chains involved in slave labor or deforestation accusations. This is particularly true in the agribusiness sector, such as meat processing companies having cattle suppliers tied to embargoed areas, or food companies acquiring soy from plantations in deforested areas.
Financial institutions are a potential target as well. Even though real and widespread consequences for investors/lenders are yet to be seen in Brazil, this is not completely unheard of. One specific precedent gained attention a few years ago, when a European bank with a presence in Brazil received a BRL 47.5 million fine from IBAMA (the Brazilian equivalent to the United States Environmental Protection Agency) due to allegedly financing soy and corn plantations located in areas that had been embargoed by IBAMA. At the time, news media reported that this precedent “marked a shift of strategy from IBAMA, which traditionally focused efforts against farmers” and was then starting to “seek all agents enabling the business, in order to suffocate their financing and punish all links of supply chains causing deforestation. . . .”
It is worth noting that companies in Brazil are exposed to liability risks regardless of developments in Brazilian law, regulation or case law, meaning ESG compliance is a pressing concern no matter what. Indeed, due to the cross-border nature of issues involving climate change or human right violations, cross-border litigation is a reality that should be expected. This was the case, for example, of BHP being sued in England due to the Samarco/Mariana dam collapse disaster (2020), of Norsk Hydro being sued in the Netherlands due to the alleged water pollution caused by irregular waste disposal in its Barcarena aluminum plant (February 2021), and of Groupe Casino being sued in France in connection with supposedly selling beef products linked to deforestation and land grabbing in the Brazilian Amazon (as recent as March 2021).
As the pressure for the adoption of ESG-compliant practices rises more and more, companies and financial institutions operating in Brazil should be on the lookout for climate, supply chain and human rights litigation, particularly in light of the STJ precedent supporting the indirect polluter notion and the number of precedents that already exist and serve as an example of what is ahead of the curve.