Brazil's banks to incorporate climate change risks into stress tests

SAO PAULO (Reuters) -Brazil’s central bank announced on Wednesday new rules making it mandatory for banks to incorporate climate change-related risks, such as droughts, floods and forest fires in their stress tests, starting in July 2022.

Central bank director Otavio Damaso said the new regulation aims to avoid potential financial instability stemming from climate-related risks. However, for now the central bank will not require additional capital to cover for potential climate-change related risks, leaving that decision to banks.

The move puts Brazil’s central bank among the growing ranks of financial regulators demanding climate-related action from banks. A few countries, including France and the Netherlands, have already launched stress tests incorporating climate-change related risks, and many others are in the pipeline, according to the Financial Stability Institute.

Brazil’s central bank is not prohibiting lenders from extending any loans, but the climate-change related risk analysis could make credit lines more expensive for certain companies and sectors if banks find it necessary to allocate more capital to assume the risks they have identified.

In April 2022, the regulator plans to launch its own stress tests for climate-change related risks, incorporating all banks under the same risk criteria.

The regulator also made it mandatory for banks to disclose climate-related information as part of financial reporting by July 2022, in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD), set up by the G20’s Financial Stability Board guidelines.

The central bank also announced rules forbidding rural loans to projects on indigenous land or in certain areas in the Amazon biome. However, it delayed the creation of a “sustainable loan” stamp for projects that follow best environmental practices.

Central bank officer Claudio Filgueiras said the regulator is still discussing that framework with the agribusiness sector, which has criticized the proposed rules. In comments sent to the central bank in May, some lobby groups said the regulation could hurt vital financing.

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