The Central Bank of Brazil published, on 15 September 2021, a set of rules aimed at revising and strengthening governance rules for the implementation of corporate social, environmental and climate responsibility policies in the financial sector.

The rules include, notably, new requirements for the management of climate, social and environmental risks to meet adequate capital levels for such exposures, with a focus on banking processes that assess portfolio-level exposures, record keeping, documentation and disclosure.

In addition, the disclosed regulations include the elaboration of the Social, Environmental and Climate Responsibility Policy (PRSAC) by the institutions that make up the National Financial System (SFN), as well as the regulation of disclosure by these institutions.

The set of regulations also includes existing legal and infra-legal impediments on social, environmental and climate issues in rural credit contracting, which are already verified by financial institutions and on which the Central Bank will establish a second line of defence. The initiatives are in line with recent international recommendations and trends in climate and environmental risk management.

The BCB is preparing a list of ESG risks that banks will be required to incorporate into their credit models. Banks will develop mitigation and response plans to manage these risks and be prepared to compensate for losses that may arise from events such as environmental fines, land contamination, natural disasters or excessive use of resources.
A first round of prudential regulation is scheduled for 2021, in which medium- and large-scale banks are required to review portfolios and describe inherent ESG risks. In addition, they will also have to conduct sustainability-focused stress tests that require ESG criteria to be fully merged into their credit models. A second and final round is expected in 2022, in which banks will have to pass or obtain a certain grade.

The decision to review ESG regulation reinforces the view that the central bank understands the potential impact of these environmental risks on the overall stability of the system.