Brazil to incorporate climate into financial regulation

April 14, 2021|Written by Graham Caswell|Banco Central do Brasil

Brazil’s central bank has launched a public consultation process on new rules incorporating environment, social and governance (ESG) factors into its regulation of financial institutions.

The proposed new regulatory framework from the Banco Central do Brasil (BCB) explicitly includes climate change, and aims to incorporate the most recent international debates on sustainability issues. It will also strengthen a variety of definitions, criteria and requirements regarding social, environmental and climate-related issues.

Under the new rules, related risks would be integrated into established credit, market, liquidity and operational risk management frameworks. The proposal defines social, environmental, physical and transition climate-related risks, establishing minimum criteria for identification, measurement, evaluation, monitoring, reporting, control, and mitigation of the adverse effects from the interaction of these risks.

Financial institutions will have to address these risks in their risk appetite statement and in the management of business continuity, the risk governance structure, and stress testing programs. More complex institutions will be required to perform scenario analyses. The new regulations will also require financial institutions to monitor their reputations, as well as concentration of risks in vulnerable economic sectors or geographic areas.

The BCB launched the sustainability dimension of its work agenda, Agenda BC#, in September 2020. The goal is to promote sustainable finance, manage social, environmental and climate risks to the financial system, and integrate ESG variables into the bank’s decision-making process.

Last month, an analysis of G20 central banks and financial supervisors ranked the BCB second for its action on climate change.

This page was last updated April 23, 2021

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