Follow on Google News
Sustainable credit
Recent history teaches us the importance of financial stability: less than two decades ago, a crisis in the American banking system led the global economy into a severe recession. Since then, the regulatory apparatus has evolved to deal with market risk and credit risk. However, the current situation calls for attention to other types of risk, including environmental risk. Climatic factors can affect the stability of the financial system, and environmental risks need to be managed. The severe drought that hit the southern region of the country, causing damage to the harvest, is a good illustration of this relationship, given the strong presence of credit in financing the countryside.
The financial system's experience with market and credit risk management is older. The credit bureaus have been providing information and tools to mitigate the risk of default for decades. Experience with environmental risk management has only just begun. Where are we and where are we going?
In December 2022, the Central Bank of Brazil published the second edition of the Social, Environmental and Climate Risks and Opportunities Report. The name of the report refers to the acronym ESG. The document takes stock of actions related to the environmental, social and governance agenda. It is interesting to note that this agenda, born and fostered in the private sector, has entered the vocabulary of regulatory bodies and economic policy makers.
The topic of ESG has been covered in this space on a few occasions, and it's always worth revisiting its meaning. The acronym represents a collection of good practices that seek to reconcile economic progress with environmental preservation, social progress and transparency. More than just a slogan, As a result, this principle has been incorporated into companies“ decision-making processes, changing the ”cost" of bad practices. The ESG label can mean, for example, better access to resources on the capital markets.
One of the challenges for the practical application of these principles is the standardized measurement of good practices and risks, as well as the regular dissemination of results. For this reason, in an international effort, TCFD o “Task Force on Climate-Related Financial Disclosures” created a task force in 2017 to guide the disclosure of information on the risks and business opportunities related to climate change. The Central Bank of Brazil has declared its formal support for the task force's recommendations.
In the balance sheet published in December, the monetary authority highlighted a set of rules that require financial institutions to disclose information on social and climate risks and opportunities. The form of this disclosure will be further improved with the inclusion of metrics and targets, following discussions at international level. The deadline for this is 2023.
In addition to the regulatory and supervisory role of the monetary authority, another important delivery mentioned in the report is the studies that seek to measure the impact of climate risk on the national financial system. A study published in the November 2022 Financial Stability Report analyzed the size of the share of credit in the hands of the sectors most exposed to the so-called transition risk - that is, the risk of being affected by regulatory and behavioral changes resulting from the transition to a low-carbon economy. According to the results, around 8% of the credit portfolio goes to borrowers who may be affected by the transition risk.
In the area of social practices, the Central Bank of Brazil's ESG balance sheet highlights initiatives to promote education and financial citizenship, which represents an opportunity for the credit market and the financial system in general. The private sector's initiatives in this area are also noteworthy. Since the middle of the last decade, this issue has been engaged with by companies and the various media, seeking to increase knowledge about financial instruments and budget management.
In the first article of the year, we highlighted the results of a survey carried out by the National Association of Credit Bureaus (ANBC), which seeks to monitor the population's knowledge of credit ratings and the Positive Registry. This is just one example of what the sector has been doing for years to improve the credit environment in Brazil.
The sector believes that the regulatory effort and the good practices that have emerged in the private sector must go hand in hand and will continue to work to promote the sustainability of the credit market.
Thanks for reading! Access other content at ANBC website.
By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor
