Brazilian banks must measure the influence of local weather change on their companies

The BC will start demanding the inclusion of climate risks in risk management, in addition to social and environmental responsibility policy

Brazilian banks will enter a new era in December on how to measure the impacts of climate change on their businesses. The Central Bank (BC) will begin to demand the inclusion of climate risks in risk and capital management, in addition to a social, environmental and climate responsibility policy and an annual report with standardized information on the subject.

In Latin America, Brazil is at the forefront of this process, which has begun to be felt by the main economies of the world. In October, the BC should present in the Financial Stability Report (REF) some references for institutions to follow in preparing their estimates.

The document should include, for example, details on how institutions will have to calculate the effects of an extreme drought on their services and assets, in addition to a study on transition risks. As it is a learning experience for everyone, BC promises not to be so demanding at the beginning of these works. It has already warned that banks should not necessarily follow this model, although it will monitor preparations to comply with the new regulations in its supervision schedule for the semester.

“In general, aggregated views present simplifications, as it is necessary to adapt the study to the availability of data and information from different types of institution. If the risk is relevant to a given institution, it should develop a more refined technique to assess the risk.

Anticipating the rules

Without a standard defined by the BC on how to account for climate risks in their balance sheets, financial institutions in Brazil are seeking support from experts to follow the regulator’s new rules, which must be known in two months. Consultancies have been sought to clarify doubts on the subject, and the tendency is for everyone to “deliver the proof”, but some houses must delve more deeply into the subject and be more aggressive than others.

“The largest end up being at the forefront, as indices and external investors generate pressure. Not everyone is on the same page. But regulation brought the urgency of the issue, it is no longer a voluntary issue”, said the coordinator for Latin America and the Caribbean of the initiative for the financial sector of the United Nations (UN) program, Maria Eugenia Sosa Taborda.

The BC emphasizes that there is no prescribed methodology or elaboration technique for stress tests, based on those established by the regulation: sensitivity analysis; scenario analysis; and reverse stress test. “The choice of which methodology and the complexity of the technique applied must be appropriate to the risk incurred in each institution”, argues the BC, reinforcing that it has positioned itself on the subject in the Financial Stability Report (REF).

In the market, the Sustainability director of the Brazilian Federation of Banks (Febraban), Amaury Oliva, stated that, despite the BC not having defined specific methodology or scenarios for the stress tests, it created important requirements, such as temporal, geographic, sector and alignment with aspects already considered in risk management. “We have a respectful and constructive dialogue with the BC, which expects an evolutionary agenda. It is not to be punished, it is to advance as a banking sector.”

According to Oliva, Febraban has already developed, with Coppe/UFRJ and the company WayCarbon, “tropicalized” climate scenarios for key sectors of the Brazilian economy, which can be subsidies for analysis and stress tests of banks. According to a 2021 report, based on BC data and a study developed by Febraban, the exposure of the credit portfolio for companies to environmental risk was 43.60% at the end of 2020. On the other hand, moderate or high exposure to climate change was 53.29%.

In addition, the federation created a specific group to implement the new BC rules, with monthly meetings to clear up doubts and provide guidance on databases and procedures. According to Oliva, the associates, who already follow a self-regulation on the subject since 2014, are working “non-stop” to comply with the new rules in December. “We put the ruler up there, we want banks to align their portfolios with the Paris Agreement, helping clients in this transition”, says Sosa Taborda.

Setting a standard for the banking sector is one of the challenges

As there is no international standard so far and many believe that one will hardly be done, some financial institutions have started to create their own basic requirements to advance services and transparency in relation to climate change.

What the whole world is asking is: how to set a single standard for all types of items and negotiations that makes sense for a specific market and, at the same time, serves as a reference for operations with other agents and countries? In the same way that it is not intended to overly plaster a market that is just in its infancy, there are fears of the risks that may come from it, especially the so-called greenwashing, which is the practice of classifying assets as green when, in fact, they are not.

To give you an idea, the three largest risk rating agencies in the world have also created their own benchmarks. Despite being in the same sector and pursuing the same objective of measuring the financial health of a paper, company or government, they have different rules for variables related to climate issues.

The information is from the newspaper. The State of São Paulo.

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