The Story of Sustainable Finance Regulation in Brazil

In this interview, our special guest is VivianeTorinelli. She is a PhD candidate, focusing on the exposure of international reserves to environmental risks. Viviane also co-founded BRASFI, a Brazilian Research Alliance on Sustainable Finance and Investment.

Viviane is a corporate governance professional with 20 years of experience in public and private sectors, including risk

management and compliance areas, internal and external audit, M&A as well as due diligence and controller´s office - both in Brazil and abroad.

In our short interview, she will shortly present to us the history of Sustainable Finance Regulations and Voluntary Auto-Regulatory Initiatives in Brazil

Nadine: Hi Viviane! Can you tell us a little bit more about the current situation regarding sustainable finance in Brazil? To what extent are the government, investors,and the Central Bank already aware of this trend? 

Vivi: Yes, for sure. I need to state that what I am saying is just an opinion and not an institutional position. Well, the financial markets in Brazil are nowadays widely talking about ESG [environment, social and governance]. You can see many webinars and podcast, new products, and a lot of commitment among financial market actors. So, it seems like sustainability is entering the main agenda of the local market. We are also seeing an increase in retail products now.

So it is a boom in my perspective and a result of great market opportunities.

Yet, sustainability is not new for the Brazilian Market. In that regard, I would highlight part of what the deputy governor for international affairs and corporate risk management at the Central Bank of Brazil answered in a public interview to the Network for Greening Financial System (NGFS) in June 2020. This is a network of more than 60 Central Banks worldwide. I would like to share these points with you, since it also reflects the evolution of the financial market and sustainable finance in Brazil. 

In 1995 five major state-owned banks, here in Brazil, signed a green protocol which set a chart of principles for sustainable development. 

In 2009 and 2010 the BCB, the Central Bank of Brazil, published two regulations requiring financial institutions to verify borrowers’ compliancy with environmental legislation as one of the conditions to provide credits for rural activities. This legislation aimed at protecting the Amazon Forest and fostering a low carbon emission agriculture. 

In 2014, the Central Bank of Brazil issued a key resolution for the markets on social environmental responsibility which set the ground for principles of social environmental practices to be followed by financial institutions.

Under this resolution, financial institutions are required to have social environmental risk management work plans and to implement a policy for social environmental responsibility.

Each financial institution is required to implement a policy that is proportional to its exposure to environmental risk (a challenge for the evaluation and assessment) and to its related importance to the financial sector as a whole, based on the nature of its services and activities.

In 2016, in the supervisory action plan, the Central Bank of Brazil implemented the first version of social environmental risk matrix which considers both social environmental risks and the adequacy of the risk management action plans. Since then, the Central Bank of Brazil has been continuously improving the components of financial institutions risk assessments in close consultation with academic researchers and other jurisdictions. 

In 2017, in an enhancement to the previous risk management regulation, the Central Bank of Brazil devised an integrated risk management approach under which social environmental risks are part of financial institutions structures.

Under this approach, financial institutions must identify, measure, access, monitor and report basic risk management and mitigate social environmental risks.

Additionally, financial institutions are required to consider social environmental risk in their internal process of capital adequacy assessment with the mandatory disclosure of any social environmental risk exposure. 

The voluntary auto-regulatory initiatives are also strong in Brazil and are led by the Brazilian Federation of Banks (Febraban). This Federation created a social responsibility and sustainability commission, launching a self-regulatory task force to meet the Central Bank of Brazil standards. So, their recommendations are already being considered by all major financial institutions in Brazil based both on regulatory requirements and voluntary behaviour. Finally, the Central Bank of Brazil, together with the Ministry of  Economy, is part of a project, sponsored by the German International Cooperation Agency, to expand the market for Sustainable Finance in Brazil. The project is expected to result in contributions to the improvement of social environmental and climate change supervisions. 

So why I am telling you this long history of Brazil?

To show that Brazil is a country with great potential and high exposure to environmental events, but it also has a relative long history in Sustainable Finance regulation and voluntary auto-regulatory initiatives. 

Nadine: Thank you very much for these insights. 

If you want to learn more about the role of central banks for sustainable finance, check out our third Sustainonomics podcast episode with Viviane Torinelli, "The Role of Central Banks for Sustainable Finance".


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