Brazil’s Central Bank Set to Incorporate Social, Environmental and Climate Factors into Financial Regulation

Following in the footsteps of other central banks around the world, and in face of the pressing need for an inclusive and sustainable economic recovery after the COVID-19 pandemic, on April 7, 2021, the Central Bank of Brazil (BCB) launched public consultation No. 85/2021 (Consultation). The Consultation includes proposed amendments and new rules governing the management of social, environmental and climate risks by financial institutions (and other institutions with operations authorized by the BCB), as well as the requirements to be observed by these institutions in the elaboration and implementation of their respective Social, Environmental and Climate Responsibility Policy (PRSAC).

The BCB joined the Network for Greening the Financial System (NGFS) on March 25, 2020, and, on September 8, 2020, launched the “Sustainability Dimension” of its work agenda (Agenda BC#), which aims to promote sustainable finance, proper management of social, environmental and climate risks in the National Financial System (SFN), and integration of ESG variables into BCB’s decision-making process.

Among the changes proposed in the Consultation is the revocation of Resolution 4,327/2014, which establishes guidelines for financial institutions in connection with the development and implementation of their Socio-Environmental Responsibility Policy (PRSA). Instead, institutions will now be required to have a PRSAC incorporating the climate dimension, to be revised at least every three years. Both the PRSAC and the measures adopted for its effective implementation must be publicly disclosed. The new guidelines and requirements will be proportional to the segment in which the financial institutions operate.

Additionally, the BCB will require financial institutions to incorporate potential losses associated with social, environmental, and climate change issues into their risk assessment and management structure. The definition of  “climate risk” is that of the Task Force on Climate-related Financial Disclosures (TCFD), including the differentiation between transition and physical risks.

The consultation closes on June 5, 2021.

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