Brazil Publishes Draft Sustainable Taxonomy Framework for Public Consultation

In late 2024, Brazil published a draft of the country’s proposed sustainable taxonomy framework (the Taxonomy), which the country aims to make mandatory in some instances by 2026. Similar frameworks have been published by other jurisdictions, including Colombia, the European Union, and Mexico. The aim of these frameworks is to establish clear guidelines on what is considered “sustainable,” simultaneously combating greenwashing and supporting sustainable capital formation.

However, jurisdictions have shaped the frameworks with reference to their own economic, social, and environmental realities. In the Taxonomy’s current draft, Brazil has built on a trend of Latin American countries introducing notable innovations in the treatment of social criteria and protections for sustainability issues not covered by the Taxonomy’s core objectives.

This article discusses the general structure of the Taxonomy, as well as how it may impact capital markets and financial products for those doing business in or with Brazil.

Structure of the Taxonomy

The Taxonomy follows the same general structure that has been adopted by similar frameworks in other jurisdictions, requiring (1) “substantial contribution” to one of a set of delineated objectives; (2) “no significant harm” to any of the other objectives; and (3) alignment with certain “minimum safeguards.” These requirements, particularly substantial contribution and no significant harm, are tailored to individual sectors, using the codes within Brazil’s National Register of Economic Activities.

Substantial Contribution

The Taxonomy includes both environmental and social objectives. The environmental objectives are:

1. Climate change mitigation
2. Climate change adaptation
3. Protection and restoration of biodiversity and ecosystems
4. Sustainable use and protection of water and marine resources
5. Transition to a circular economy
6. Pollution prevention and control
7. Sustainable land use and conservation, management, and sustainable use of forests

The first six of these objectives are common across taxonomies, based on the initial work of the European Union. However, given Brazil’s role as a significant steward of the Amazon and an agricultural powerhouse, the country has also included a seventh objective focused on the management and sustainability of land and forests.

Brazil has similarly assessed its particular circumstances in outlining the following social objectives, focusing on structural inequality and contribution to socioeconomic development:

1. Generation of decent work and income enhancement
2. Reduction of socioeconomic inequalities, considering racial and gender aspects
3. Reduction of regional and territorial inequalities within the country
4. Promotion of quality of life, with increased access to basic social services

The technical criteria to determine whether a particular project or activity makes a substantial contribution to any of the environmental or social criteria above are still under development. However, draft standards for certain objectives are included in the version of the framework available for comment. While these standards generally focus on climate change mitigation, the approach becomes more transversal in particular situations (such as for the agricultural sector) with a focus on particular eligible practices that may have benefits across multiple objectives.

The Brazilian Ministry of Finance (Fazenda) has noted that the technical criteria will be developed in line with several core considerations: the relevant scientific landscape; the viability of concrete/quantitative thresholds; life cycle impacts; alignment with international and national objectives; consistency across sectors; proportionality; usability (defined as a balance between ease of use and robustness); and adaptability/process for updates over time. Therefore, parties interested in shaping the criteria should consider how their arguments and comments may align with these factors.

Do No Significant Harm

Activities must also meet certain criteria that indicate that they “do no significant harm” (DNSH) to the remaining environmental and social objectives. As with the technical criteria, the DNSH criteria are also under development. However, as with other taxonomies, many of these criteria are focused on processes and compliance with particular standards rather than further technical, quantitative tests.

Minimum Safeguards

The Taxonomy will also require activities to meet certain “minimum safeguards” on matters that are not subject to specific technical criteria outlined under the other pillars. While such safeguards have traditionally been social elements, Brazil is considering safeguards across environmental, social, and governance themes.

However, Fazenda has noted that, whatever their form, these safeguards would generally be based on existing national and international standards. In particular, they reference the UN Guiding Principles on Business and Human Rights, the fundamental conventions of the International Labour Organization, and the International Bill of Human Rights. More detail is expected to become available ahead of the second phase of public consultation.

Relation to Other Taxonomies

Fazenda has examined several existing sustainable taxonomy frameworks in developing Brazil’s Taxonomy, with particular attention to the work of the European Union, Colombia, and Mexico. The Ministry aims to improve the Taxonomy’s interoperability with these and other existing frameworks. As such, the standards established in these other taxonomies will likely be a persuasive (though not controlling) data point as the Taxonomy works its way toward finalization.

Next Steps — For Government and For Business

The Taxonomy is currently open to public consultation. This process seeks to collect input from a wide range of stakeholders — including industry experts, environmental organizations, and the general public — in two phases.

The first phase (which runs through January 31, 2025) focuses on the methodology for determining sustainable activities, including information on relevant environmental and social indicators and the “minimum safeguards.” This phase also addresses the “monitoring, reporting, and verification” system, which will be responsible for connecting the Taxonomy to other regulatory obligations in Brazil. The second phase (which runs from February 1, 2025 through March 31, 2025) will work to fine-tune aspects of the Taxonomy, with particular attention to the technical limits and quantitative thresholds applicable to each relevant sector. At this time, we expect that the public consultation will focus particularly on the climate change mitigation/adaptation objectives.

As Brazil has already announced plans to tie the Taxonomy to other regulatory requirements, companies that may be impacted (either as financial institutions or as companies looking to raise capital) should not wait to develop their response. This approach is particularly important for multinational entities, who are increasingly expected to navigate a patchwork of regulatory obligations related to sustainability. Therefore, entities may wish to engage in the consultation process to underscore the need for continued harmonization between regulatory regimes or to otherwise lay out important considerations for how their own sector may be treated.

Companies looking to engage with Brazil’s capital markets should also consider how the Taxonomy’s upcoming mandatory components may impact financial strategies, from both the issuer and capital provider perspectives. While particularly relevant to sustainability-focused financial products, the introduction of regulatory components can cause ripple effects in the broader markets such that even companies less focused on sustainability may need to consider the potential impacts.

Ultimately, Brazil’s Taxonomy is one in a line of developments underscoring the increasing relevance of sustainability considerations to the business environment. While the Taxonomy does not demand a complete reimagining of entities’ sustainability strategies, companies should assess how those strategies may need to adapt and respond — particularly in an environment where pulling on virtually any sustainability thread may implicate a host of other stakeholder and regulatory considerations.

This post was prepared with the assistance of Natália Graton.