The subject of a public hearing between December of 2020 and April of this year, the new regulatory framework for investment funds in Brazil will implement the innovations brought in by the Economic Freedom Law (Law No. 13,874/19), modernizing the regulation of the industry and bringing the local market closer to the best international practices.

The resolution by the Brazilian Securities and Exchange Commission (CVM) on the subject, which is about to be published, brings in common rules for all investment funds and proposes others specific to certain categories of funds: initially, the financial investment fund (new nomenclature for funds focused on investments in stocks, foreign exchange, multimarket, and fixed income) and the credit rights investment fund (FIDC).

Among the innovations in the regulations of the FiDC, the possibility of labeling it as social and environmental stands out, as long as it invests preponderantly in credit rights arising from activities that generate social and environmental benefits. The origin of these benefits also needs to be verified by a second opinion report or through certification, in both cases based on methodologies internationally recognized for this purpose.

The requirement for an external opinion or certification on the classification of the FIDC quotas as social and environmental is aligned with the guidelines for the issuance of environmental bonds (green bonds) and social bonds (social bonds) issued by the Climate Bond Initiative and the International Capital Market Association, respectively. Both are best practice manuals adopted by the international market in this area and used by second opinion and/or certification entities to support their opinions. The objective of the insertion of requirements for the use of social and environmental labeling is to provide investors with greater security in relation to the externalities of their investment, through independent verification linked to international standards.

The requirement is necessary in view of the risk of creating social and environmental assets without clear criteria, the much feared greenwashing, due to growing investor interest in assets related to environmental, social, and governance (ESG) factors.

The CVM justified the labeling of a fund as social and environmental, targeting the fostering of the green bond market, to encourage managers of projects that offer social and environmental benefits to seek them out.

However, this labelling has the potential to also promote impact businesses, those that are profit-driven and have a mission to solve social and/or environmental problems, with a commitment to monitor their impact and financial performance.

Green bonds are issued in the capital market, the funds of which are used in projects with positive environmental aspects, which substantially contribute to the low carbon economy (such as wind power plants and solar energy generation), or projects currently with high emissions, but which are important for the migration from a high to low carbon economy, through the adoption of more sustainable practices (agricultural or transportation sectors).

Securitization of social and environmental receivables is a great opportunity for impact businesses to finance themselves, proliferate, and scale their operations.

The proposed regulation does not make it clear whether it would be possible to create FIDCs focused on exclusively environmental or exclusively social receivables. The text should be more generic in expressly including the possibility that the Social and environmental FIDC acquiring credit rights of an exclusively social, exclusively environmental, or exclusively social and environmental nature in order to cover all the activities conducted by impact businesses.

According to a recent report published by Social Progress Imperative, if we continue on current trends, the UN's 17 sustainable development goals, the 2030 Agenda, would only be achieved in 2082 (2092, considering the effects of the pandemic). Impact business is an important tool to accelerate this process.

The increased supply of financial products aimed at the low carbon economy and impact businesses contributes to the growth of the sector and, consequently, to addressing the social and environmental challenges of Brazil.