In Bolsonaro’s backyard, Brazil’s central bank urges banks to stick to a greener line

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SAO PAULO / BRASILIA (Reuters) – Brazil’s central bank prepares to require banks to account for potential losses from climate change phenomena such as droughts, floods and wildfires in stress tests, positioning itself as a global leader in ESG. financial sector regulation.

PHOTO: President of the Central Bank of Brazil Roberto Campos Neto speaks at a ceremony at the Planalto Palace in Brasilia, Brazil on February 24, 2021. REUTERS / Ueslei Marcelino

The move is under the direction of Roberto Campos Neto, former head of Banco Santander Brasil. He was appointed by President Jair Bolsonaro, who has overseen the deforestation of the Amazon rainforest and has been criticized by environmentalists.

But since Brazil’s central bank is fully independent as a result of a law that Bolsonaro himself backed, the climate change skeptic has lessened his influence over the bank’s policies.

The central bank’s actions reflect growing pressure on regulators around the world to take their environmental mandate seriously, even at the risk of disrupting credit flow.

Global warming is increasingly seen as a risk to financial stability. Brazil’s central bank has said that natural disasters caused by rising temperatures could damage borrowers’ businesses or collateral, jeopardizing R $ 4.2 trillion ($ 805.7 billion) loan repayments.

While there are currently no specific capital requirements for banks to cover environmental risks, the central bank could introduce additional buffers in the future if it considers lenders to bear higher risks, said Kathleen Krause, deputy head of the bank’s regulatory department.

“Our goal is not to prohibit lenders from making any loans, but to make banks aware of the climate change risks they face,” Krause said in an interview.

Rising sea levels could flood the land used as collateral for the loan, she said, causing losses for banks.

To cover such risks, banks may be forced to set aside more capital, which is likely to lead to more expensive borrowing.

Among the risks associated with climate change, listed by the central bank in the proposed regulations that were made public, are potential losses from the transition to a low-carbon economy, as well as droughts and floods.

If Brazil’s central bank incorporates climate change risks into the stress tests that are pending, it will put it at the forefront of regulators around the world.

According to the Institute for Financial Stability, several countries, including France and the Netherlands, have already begun such trials, although many others are under development.

CLIMATE FORECASTS

Brazil’s central bank has said it plans to launch new measures this year, with implementation starting in 2022. But banks are asking for up to 18 months to get their homes in order.

The central bank should issue climate forecasts that all lenders will use in stress tests, lenders said, adding that they have no way of predicting how quickly temperatures will rise.

“If each lender makes their own predictions, the final results in the banking industry could be very different,” said Amori Oliva, director of sustainability for the Brazilian banking lobby group Febraban.

The regulator said it is reviewing the request and may provide some guidance, such as climate scenarios published by the Network of Central Banks and Supervisors to green the financial system in July.

However, banks complain that these global scenarios are too general and require specific forecasts for a tropical country.

In addition to including global warming risks in stress tests, the central bank, which has regulated loans for projects in the Amazon biome since 2008, also proposed two new rules this year for environmental, social and rural loans.

It lays out rules to prohibit rural loans for projects on indigenous or deforested land, while at the same time creating a kind of “sustainable loan” stamp for projects that follow green zone best practices.

The regulator is also demanding more disclosure on how banks are dealing with social and environmental risks such as harassment, prejudice and deforestation.

For example, a case of racial discrimination can damage a bank’s image, scare customers away, and lead to legal action.

ON A RIGHT WAY

The central bank’s stance is in stark contrast to the ecological reputation of the Bolsonaro ultra-right administration.

Many major investors have called on the Brazilian government to take a tougher stance on environmental protection. They applaud the central bank’s environmental initiatives, but warn that this is only the first step.

“The central bank initiative is a good starting point. Brazil goes from nothing to something, ”said Daniela da Costa Bultuis, portfolio manager for Dutch company Robeco, which manages € 168 billion ($ 199.4 billion) of ESG assets. “But the government is a little behind.”

Brazil has the second greenest central bank in the world after China, according to the London-based Positive Money Group, but prospects for broader social progress and environmental policy in Brazil remain weak under Bolsonaro.

Ultimately, the influence of central bank policies will be limited until the Brazilian government implements the fiscal, political, and industrial policies necessary to address environmental concerns.

“By redirecting finance, central bank leverage can enormously help or hinder the transition,” said Positive Money economist David Barmes. “But we still need governments to show the way.”

(1 US dollar = 5.2128 reais)

(1 dollar = 0.8425 euro)

Reporting by Carolina Mandl in Sao Paulo; Additional reporting by Jamie McGeever from Brazil; Edited by Matthew Lewis

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