On September 15th, 2021, the Brazilian Central Bank published, a series of normative acts related to the past Public Consultations themes already closed¹, aiming to strengthen the rules and managing social, environmental, climate risks. It also aims the development of the Social Responsibility Policy, Environmental and Climate (ASG/ESG) by the institutions that are part of the National Financial System, as well as the regulation of the disclosure of information on social, environmental and climate risks and opportunities.
The Resolutions are:
The CMN Resolution No. 4.943 that amends Resolution No. 4.557/2017, which lays down for the risk management structure, the capital management structure and the information disclosure policy of financial institutions.
Expected to take effect on July 1, 2022, it now contains the definitions of Social Risk, Environmental Risk and Climate Risk², replacing the more generic term Socio-Environmental Risk, with concrete examples of what each one of them is. It also determines the date that each financial institutions must adapt and implement mechanisms, structures and committees for the identification, management and monitoring of such risks. Such risks may be incurred by the institution in general because of its products, services, activities or processes and the activities performed by counterparties of the institution, entities controlled by the institution and suppliers and outsourced service providers of the institution, when relevant.
The CMN Resolution No. 4.944 that amends Resolution No. 4,606/2017, which lays down an optional simplified methodology for calculating performance indicators, such as the minimum requirement for Simplified Reference Equity (PRS5), the requirements to apply this methodology and the additional requirements for the simplified structure of continuous risk management. Also scheduled to take effect on July 1, 2022, the more generic term Socio-Environmental Risk previously foreseen is now replaced by Social, Environmental and Climate risks.
The CMN Resolution No. 4.945, also scheduled to take effect on July 1, 2022, lays down for the Social, Environmental and Climate Responsibility Policy³ (PRSAC), determining that all financial institutions must establish their PRSAC, proportional to the model of business, the nature of operations and the complexity of the institution’s products, services, activities and processes. Also suited to the dimension and relevance of exposure to social risk, environmental risk and climate risk, in addition to implementing actions aimed at its effectiveness.
Resolution BCB No. 139 lays down to the disclosure of the Social, Environmental and Climate Risks and Opportunities Report (GRSAC Report)⁴, and Normative Instruction No. 153 that establishes the standardized tables for the purposes of the disclosing the GRSAC Report, both taking effect on December 1, 2022.
Resolution BCB No. 140 provides for the creation of Section 9 (Social, Environmental and Climatic Impediments) found in Chapter 2 (Basic Conditions) of the Rural Credit Manual (MCR). The provision deals with the characterization of enterprises with restrictions on access to rural credit due to legal or infra-legal provisions relating to social, environmental and climate issues, with entry into force as early as October 1, 2021.
The release of the first Social, Environmental and Climate Risks and Opportunities Report by the Brazilian Central Bank, together with the aforementioned regulations, show that good practices in social issues, governance and care for the environment, defined by the English acronym ESG, it is a real paradigm shift in the market, which should interfere with survival, competition and profit.
¹ Public Consultation No. 82/2021, relating to the sustainability indicators applicable to the granting of rural credit and the characterization of enterprises with restricted access to rural credit due to socio-environmental issues; Public Consultation No. 85/2021, regarding the improvement of social, environmental and climate risk management rules applicable to financial institutions, as well as the requirements to be observed by these institutions in establishing the Social, Environmental and Climate Responsibility Policy (PRSAC ); and Public Consultation No. 86/2021, regarding the requirements for the disclosure of information on social, environmental and climate aspects applicable to financial institutions in different sectors.
² Social risk: possibility of institutional losses caused by events associated with the violation of fundamental rights and guarantees or acts harmful to the common interest; Environmental risk: possibility of institutional losses caused by events associated with environmental degradation, including the excessive use of natural resources; Climate risk: possibility of institutional losses caused by events associated with the transition process to a low carbon economy, in which the emission of greenhouse gases is reduced or offset and the natural mechanisms for capturing these gases are preserved.
³ PRSAC consists of a set of principles and guidelines regarding social, environmental and climate nature to be observed by the institution in conducting its business, activities, and processes, as well as in its relationship with stakeholders.
⁴ The GRSAC Report must contain information regarding the governance of risk management, including the attributions and responsibilities of the institution’s bodies involved in the management of social risk, environmental risk and climate risk, such as the board of directors, if any, and the institution’s board; real and potential impacts, when considered relevant in the strategies adopted by the institution in business and in risk and capital management in the short, medium and long-term horizons, considering different scenarios, according to documented criteria; and risk management processes.