Brazil: The Social And Environmental Responsibility Policy Of The Brazilian Financial Institutions

Last Updated: 6 May 2014
Article by Walter Stuber

On April 24, 2014, the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) approved the guidelines that must be observed in the establishment and implementation of the Social and Environmental Responsibility Policy (Política de Responsabilidade Socioambiental - PRSA) by the financial institutions and other entities authorized to operate by Central Bank of Brazil (Banco Central do Brasil – Bacen). The matter is regulated by CMN Resolution No. 4327, of April 25, 2014 (CMN Res. 4327/2014).

I. Purpose and Framework

Each institution must adopt its own PRSA considering the principles of relevance and proportionality as indicated below:

(i) relevance means the degree of exposure to the social and environmental risk of the activities and transactions of the institution; and

(ii) proportionality means the compatibility of the PRSA with the nature of the institution and with the complexity of its activities and financial products and services.

II. Social and Environmental Responsibility Policy

The PRSA must contain principles and guidelines that direct the actions of socio-environmental nature in the businesses and in the relationship with the stakeholders. The stakeholders are the customers and users of the products and services offered by the institution, the internal community to the organization and other persons that as per the assessment of the institution are impacted by the institution´s activities.

The stakeholders should be encouraged to participate in the process of drawing up the policy to be established. The PRSA will establish guidelines on the strategic actions related to its governance, including for purposes of social and environmental risk management, and it must be subject to evaluation every five years by the Officers (Diretoria) and of the Board of Directors (Conselho de Administração), if any.

The adoption of a PRSA is admitted for: (i) financial conglomerate; and (ii) cooperative credit system, including central cooperative credit and, when applicable, their confederation and cooperative bank.

III. Governance

To ensure the fulfillment of the goals and guidelines of the PRSA, the institution must keep governance structure compatible with its size, the nature of its business, the complexity of the offered services and products, as well as with its activities and adopted processes and systems. This governance structure must provide conditions for the exercise of the following activities: (i) implement actions within the framework of the PRSA; (ii) monitor compliance with the established actions on the PRSA; (iii) assesses the effectiveness of implemented actions; (iv) verify the adequacy of the social-environmental risk management established in the PRSA; and (v) identify any shortcomings in the implementation of the actions.

The institution can establish a Committee on Social and Environmental Responsibility, with advisory status, bound to the Board of Directors or, when there is no Board of Directors, to the Officers, with the assignment to monitor and evaluate the PRSA, and propose improvements. Whenever there is such Committee, the institution will have to disclose its composition, including if any interested party outside the institution is appointed to be a member of the Committee.

IV. Management of the Social and Environmental Risk

For the purposes of the CMN Res. 4327/2014, social and environmental risk means the possibility of loss of the institution arising from social and environmental damage. The social and environmental risk must be identified by the institution as a component of the various types of risk to which the institution is exposed.

The social and environmental risk management of the institution must consider: (i) systems, routines and procedures to identify, qualify, evaluate, monitor, mitigate and manage the social and environmental risk in the activities and transactions of the institution; (ii) data registry concerning effective losses due to social and environmental damage, for a minimum period of five years, including values, type, location and economic sector object of the transaction; (iii) prior assessment of the potential social and environmental impacts from new forms of products and services, including in relation to the reputation´s risk; and (iv) procedures for adequacy of social and environmental risk management to the legal, regulatory and market changes.

When conducting transactions related to economic activities with greatest potential to cause social and environmental damage, the institution must establish specific criteria and mechanisms of risk assessment.

V. Action Plan

The institution must establish an action plan aiming at implementation of the PRSA. This action plan will define the actions required for the adequacy of the organizational and operational structure of the institution, if necessary, as well as the routines and procedures to be carried out in accordance with the guidelines of the policy, according to a schedule specified by the institution.

The PRSA and the action plan must be approved by the Officers and by the Board of Directors, if any, ensuring proper integration with the other policies of the institution, such as the credit, human resources management and risk management policies. After this approval is granted, the actions corresponding to the action plan shall be implemented in accordance with the following schedule: (i) until February 28, 2015, by the institutions required to implement the Internal Process for Assessing the Adequacy of Capital (Processo Interno de Avaliação da Adequação de Capital - Icaap), according to the regulations in force; and (ii) until July 31, 2015, by the other institutions (which are the smaller institutions).

Furthermore, the institution must: (i) designate a Director responsible for fulfillment of the PRSA; (ii) formalize the PRSA and ensure its internal and external disclosure; and (iii) maintain documentation relating to the PRSA at the disposal of Bacen.

Pursuant to CMN Res. 4327/2014, Bacen may order the adoption of controls and procedures concerning the PRSA, establishing a deadline for its implementation.

VI. Conclusion

The strategy of the Brazilian regulator was to create initially generic rules that are adaptable to the characteristics of each institution. The new regulation requires each financial institution to perform an in-depth brainstorming exercise about its activities and its business profile and from that exercise, implement its own policy, with guidelines for the adoption of good practices and mitigation of the environmental and social risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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