After two years in public consultation, the Brazilian Central Bank (BCB) enacted Resolution no. 4,327 on April 28, 2014, establishing guidelines for financial institutions (and other organizations whose operations are authorized by the BCB) in connection with the creation and implementation of Social and Environmental Responsibility Policies (SERP). Compared to the 2012 public consultation draft, these new guidelines are more generic, suggesting that this is a first step and that additional regulatory actions to improve the guidance should be expected.

Resolution no. 4,327 provides that the principles of relevance and proportionality should be considered when covered entities consider implementing SERP that govern their social and environmental initiatives as well as their relationships with third parties. Moreover, SERPs should provide for governance strategies, particularly regarding the management of any social and environmental risk, which refers to the possibility of losses due to socio-environmental damages. It is worth noting that the 2012 draft did not relate risk to the occurrence of damage, but just to “social and environmental matters.” Additionally, an organization’s SERP governance structure should ensure compliance with its policies and provide guidelines regarding the implementation, monitoring and assessment of its actions, and the identification of any related deficiencies.

The 2012 draft provided for a greater number of aspects to be considered in social and environmental risk management, as well as the need to create specific mechanisms for activities related to forests, mining and oil and gas. On the other hand, Resolution No. 4,327 requires specific criteria for risk assessment only for those activities with a higher potential for causing social and environmental damages (these activities were not specified).

Among the components that institutions should consider in risk management, it is worth mentioning two. First, the recordkeeping of real losses due to social and environmental damages, which should be done for a minimum period of five years. And second, any prior assessment of potential negative social and environmental impacts of new products and services, including its relation to reputational risks.

Resolution no. 4,327 also states that institutions should establish action plans aimed at implementing their SERPs. For institutions required to implement the Internal Review Process of Capital Adequacy, the deadline for SERP approval and initiation of the respective action plan is February 28, 2015. For remaining institutions, the deadline is July 31, 2015. SERPs should be revised every five years.

The mandatory SERP implementation by covered institutions is a significant development, as it is a guiding element for funding approval in connection with potentially polluting projects involving social and environmental risks. It is a mechanism for guaranteeing legal certainty for both banks and customers.

For more information about this Legal Update, please contact Luiz Gustavo Bezerra, Eduardo Lima and Gedham Medeiros Gomes.