Environmental and Social Risk Management in Brazilian Banking: From an Environmental and Social Management Structure to Climate Scenario Analysis Development

The Central Bank of Brazil is taking encouraging steps for greening the country’s financial system. In 2014, the Brazilian National Monetary Council issued Resolution 4327, a principle-based resolution that required all Brazilian financial institutions to develop an Environment and Sustainability (E&S) management system with a comprehensive scope.

Three years later, Resolution 4557 was published, requiring risk management and structure for capital management of Brazil’s financial institutions, and in 2020, the Central Bank of Brazil joined the NGFS. In this study, we assess and benchmark the impacts of the Central Bank of Brazil’s Environmental and Social Risk Management policy by conducting interviews with Brazilian large- and medium-sized public, private, and development financial institutions. Central Bank of Brazil staff were also interviewed to gain clearer understanding that what kind of methodologies, tools, and practices would be better to assess financial institutions based on Brazilian Monetary Council (CMN) Resolutions 4327 and 4557.

Based upon our findings, we developed a self-assessment tool that will provide a checklist to help banks grasp the concepts behind the principles-based approach of the national E&S regulatory framework. We found Tropicalisation of international benchmarking from oversight bodies and market players (mainly those related to Taskforce on Climate-Related Financial Disclosures recommendations) is a way to improve E&S risk management process in Brazil (and potentially in other Latin American countries). Similarly, since 2020, high-level management engagement has enabled the Central Bank of Brazil to begin a better integration of E&S and climate issues into its regulation and supervision.