For decades the ideals of Friedman shaped how managers, shareholders and investors made decisions: maximise shareholder value, trust market efficiency, and leave environmental and social concerns to the State and the law. What is changing now is not that companies have suddenly discovered virtue, but that the State is redrawing those background rules, deciding, ex ante, where capital is even allowed to look ‘sustainable’. Brazil’s new Sustainable Taxonomy is a concrete instance of that move, and this post uses it as a starting point to ask a larger question: what does regulation look like when it designs the market rather than merely correcting it?
What is ‘Regulatory Architecture’?
The problem is not merely that companies fail to act sustainably. It is that the very rules that shape their behaviour make it difficult for them to do so. That is the idea behind ‘regulatory architecture’: the set of legal rules and incentive structures that shape how economic agents behave, much like a building’s architecture shapes how people move through it. Change the architecture, and you change the behaviour it produces.
This is where the State comes in. Economist Mariana Mazzucato suggests in her book Mission Economy that we should rethink the capabilities and role of the State so that, together with the private sector, it can tackle major societal challenges, such as the climate crisis. The idea is that ends should be prioritised over means. Mazzucato goes further, arguing that the State can act not merely as a corrector of market failures but as a ‘market shaper’ that helps to create and direct markets in the first place.
Sustainability law can draw on this proposal. The emphasis shifts from correcting failures ex post, through liability, sanctions and command-and-control rules, towards designing, ex ante, a legal and institutional architecture capable of steering capital towards more efficient and more sustainable markets.
The Brazilian Sustainable Taxonomy
Enacted by Decree No. 12,705 of 31 October, 2025 (on the eve of COP30 in Belém, Brazil), the Sustainable Taxonomy turns this idea of regulatory architecture into positive law, as an instrument of the federal government’s Ecological Transformation Plan.
The Taxonomy is described as a ‘dictionary of sustainability’ that defines, based on technical and scientific criteria, which economic activities, projects or assets are sustainable, considering mitigation and adaptation targets related to climate change, among other socio-environmental criteria.
It is, in short, a clear example of the market-shaping role in practice: the State does not merely correct an existing market but actively participates in creating and configuring it.
The Taxonomy does not penalise the pursuit of profit, an inherent (and indispensable) element of any business activity, but rather guiding investors and companies in selecting investments that benefit the planet and society, thereby reducing the risks of greenwashing – or, more aptly, ‘sustainability washing’.
It would be a mistake, however, to present this as environmental law finally ‘discovering’ the market. Environmental and financial regulation in Brazil has long operated inside a capitalist logic, from environmental-liability rules to the climate and socio-environmental risk framework that the National Monetary Council and the Central Bank built into the financial system in 2021.
What distinguishes the Taxonomy is not that it takes economic incentives seriously, but where it intervenes: instead of pricing harm after the fact, or requiring firms merely to disclose their exposure, it defines, upstream, what counts as sustainable and lets that definition steer the allocation of capital. The novelty lies in the point of intervention — from ex-post correction and disclosure to ex-ante classification — rather than in any belated reconciliation between regulation and markets.
That the Taxonomy can also raise the bar is telling: in the agricultural sector, an activity that involves the suppression of native vegetation is not treated as sustainable even where the clearing would be lawful under the Forest Code. The classification thus operates as a standard that can sit above the legal floor, rather than as a mere restatement of it.
What about Corporate Governance?
To see why the Taxonomy matters, it helps to set it apart from a tool it is easily confused with: mandatory sustainability disclosure. Brazil's securities regulator — the Comissão de Valores Mobiliários (CVM) — had, through CVM Resolution 193/2023, required listed companies to report from the 2026 financial year under the sustainability-disclosure standards of the International Sustainability Standards Board (the ISSB's IFRS S1 and S2). In May 2026, however, CVM Resolution 244/2026 reversed course, turning that duty into a voluntary, ‘ comply-or-explain’ regime. Disclosure of this kind tells you how a company describes its own performance. The Taxonomy does something different: it does not ask firms to report on themselves at all, but supplies an official, shared definition of what counts as sustainable — and then uses that definition to steer capital. The two are complementary, but they intervene at different points; and the recent back-and-forth over disclosure only sharpens the contrast, since reporting duties can be tightened or relaxed while the Taxonomy reshapes the very criteria by which money is allocated.
In this sense, the Brazilian government seeks to confer upon sustainability law the role of reconfiguring economic incentives and guiding the allocation of resources according to environmental and social objectives.
To see what changes, it helps to recall what came before. Until now, ‘sustainable finance’ in Brazil rested on a patchwork: the Central Bank’s socio-environmental and climate-risk rules for banks, environmental impediments attached to subsidised rural credit, and a voluntary ‘green taxonomy’ maintained by the Brazilian banking federation (FEBRABAN). Each actor effectively decided for itself what counted as green, leaving investors to navigate competing definitions and firms free to label almost anything ‘sustainable’.
The Taxonomy replaces that fragmentation with a single official reference, and it comes with a concrete lever. Article 7 of the Decree expressly authorises the federal administration to use the classification to direct, reduce or withdraw fiscal and credit incentives, as well as to label financial products, screen securities issuers and shape sustainable public procurement, though the Decree binds only the federal administration's own instruments, leaving adoption by the private sector and by other levels of government voluntary for now (Article 7, § 3).
A concrete example makes the shift tangible. Before the Taxonomy, a reforestation or bioenergy project seeking subsidised credit was judged against each lender's own, often voluntary, notion of what counted as 'green', so that the same project could be 'sustainable' at one bank and unremarkable at the next. Now, public and development finance can apply a single, official test. Take the ‘Banco Nacional de Desenvolvimento Econômico e Social’, Brazil's national development bank : a project that meets the Taxonomy's three-part standard becomes eligible for cheaper, earmarked green credit, provided contributes substantially to an environmental or social objective, cause no significant harm to the others, and comply with minimum safeguards (Article 6). A project that clears native vegetation, even lawfully, would fail that test. The consequence is financial and concrete, not rhetorical: the cost of capital, rather than the threat of a penalty, becomes the lever for change.
A Work in Progress
The Taxonomy is being rolled out in phases: adoption is voluntary at first, with the stated intention that it become mandatory as implementation matures over roughly three years. Several questions remain open: how strictly the criteria will be enforced, and how investors and rating agencies will actually use the classification once it is in place. There is still no concrete data or case studies showing whether the model works and, more importantly, how the market will respond, simply because implementation has only just begun.
Even so, the Taxonomy is a real step forward: a legal framework that takes seriously how managers, investors and shareholders actually make decisions, and that pursues sustainability without implying a renunciation of economic efficiency and profit.
The real test still lies ahead. A taxonomy is only as good as the capital it moves and the rigour with which its criteria are applied. If enforcement is loose or adoption stalls, it risks becoming an elegant dictionary that no one is required to consult. If instead the State follows through, pricing sustainability into public and development finance and holding the line on criteria that sit above the legal floor, Brazil will have shown that environmental regulation can work not by punishing the market after the fact, but by redesigning, from the outset, the rules of the game that decide where capital flows. That, more than any single project it funds, is what makes the Sustainable Taxonomy worth watching.
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This blog post is based on the paper to be presented at the conference Sustainability Law: Law’s Response to the Convergence of Crises, 16-18 September 2026, at the University of Oslo
