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PTIntegrating prudential risk management and sustainability disclosures in the banking sector
Several jurisdictions, including Brazil, have been making progress in establishing disclosure standards aimed at improving the consistency and comparability of sustainability-related information. In this context, the financial sector already operates under a structured regulatory framework, with established requirements for governance, risk management, and compliance — possibly more structured than regulatory frameworks in other economic sectors.
Current regulations recognize that financial institutions can impact society, the environment, and the climate both “from the inside out” — since the institution must manage the impacts arising from its activities — and “from the outside in,” due to the possibility of suffering losses resulting from social, environmental, or climate risks (RSAC, according to the Portuguese acronym).
Thus, RSACs are addressed from two perspectives: while the Social, Environmental, and Climate Responsibility Policy concerns the institution’s actions in conducting its activities and their impacts on the external environment, Risk Management concerns the prudential perspective, that is, the need to manage the possibility of loss resulting from events of a social, environmental, or climate nature.
Integration of Guidelines
Complementing the RSAC standards, the National Monetary Council (CMN) issued Resolution 5,185 in 2024, which addresses the reporting of financial information related to sustainability as an integral part of the consolidated financial statements, in line with the guidelines of the Brazilian Committee on Sustainability Pronouncements (CBPS).
The requirement to disclose this information takes effect starting with the 2026 fiscal year for financial institutions that are publicly traded companies or larger institutions (Segments 1 and 2), where total assets or exposures exceed 1% of the national GDP — that is, the 16 largest financial institutions in the country — and starting in the 2028 fiscal year for all other institutions.
Central Bank of Brazil (BCB) Public Consultation No. 127 assessed the convergence between the requirements of CBPS 01 and 02 and the GRSAC Report (RSAC regulation), with a focus on alignment with the recommendations of IFRS and the Basel Committee. Although various clarifications and reconciliations need to be made to ensure greater interoperability between the reports and legal certainty for regulated entities, the Public Consultation points toward this convergence between GRSAC and CBPS 01 and 02. The comments on the Consultation demonstrate that financial institutions are more mature regarding the topic, providing high-level practical contributions to the improvement of information management and risk management.
Currently, the prudential approach of the CMN Resolution 4.557 focused on the stability of financial institutions and companies, provides synergistic elements with the CBPS requirements, given that SAC risks are already interpreted as potential causes of financial risks. Complementarily, the CBPS requirements enhance those related to information transparency and the expected relationships between sustainability and climate aspects and companies’ financial results.
Regarding metrics related to RSAC, the provisions of CMN Resolution 4,557 require the identification and monitoring of social, environmental, and climate risks incurred by the institution as a result of its products, services, and activities, such that this information corresponds to historical and current financial impacts related to sustainability and climate.
The BCB assesses whether there are procedures for identifying, measuring, evaluating, monitoring, reporting, controlling, and mitigating the adverse effects of the interaction of RSACs on the institution’s other risks, including whether there are clearly documented and verifiable criteria for identifying RSACs as a significant source of risk. Thus, when analyzed from an operational perspective, the disclosure requirements established by the BCPS are, to a large extent, natural extensions of risk management mechanisms that are already part of the regular operations of financial institutions.
This convergence occurs particularly due to the application of financial materiality analysis: while in the prudential context Resolution 4,557 establishes that risk management must be proportional to the relevance of exposures and the potential impact of risks, the CBPS adopts materiality as a criterion for disclosing sustainability and climate-related information that may affect the economic decisions of users of financial statements.
In this context, the ability to cross-reference financial and sustainability reports — as provided for by CBPS standards — plays a significant role, helping to avoid duplicate reporting and minimize the risk of inconsistencies between information disclosed in different documents. On the other hand, the relationship between sustainability-related information and financial statements reinforces the need to document decisions and demonstrate the existence of structured processes for monitoring and mitigating risks.
When the relationship between the reports is properly established, they cease to be predominantly narrative documents (and often with a bias toward optimism) and instead describe the functioning of a management system in which each area has defined responsibilities, limits, and decision-making triggers. For this reason, the time leading up to the publication of the reports should be used to develop a strategy that makes sense and gains some maturity (even if not much in two or three years).
Opportunities for the sector
In addition to the timeline for developing the sustainability and climate strategy, it is important to consider that risks can give rise to opportunities. Given that banks’ business model consists precisely of transforming time horizons and risks, integrating sustainability and climate-related factors can help highlight previously overlooked opportunities.
In this case, the opportunity may even involve trade-offs with sustainability aspects, such as in sectors where emissions are difficult to reduce or in companies lagging behind in the climate transition. It is up to the institution, in accordance with its business model, to assess whether the risk is worth taking or not. These risks must be assessed, monitored, and mitigated as much as possible, provided there is a favorable cost-benefit ratio for risk reduction.
Additionally, opportunities are not uniform across all financial institutions; they vary according to each institution’s business model and risk profile. Therefore, identifying opportunities cannot be done in a generic manner and requires the use of market intelligence tailored to the institution’s specific context.
In this regard, special care must be taken to ensure that commercially sensitive information is not disclosed in reports. The challenge is to demonstrate to stakeholders that the bank assesses and exploits opportunities related to sustainability and climate, without revealing its strategy to competitors. As can be seen, this and other trade-offs will constantly arise during the development of the strategy and the preparation of reports.
Final Considerations
In short, incorporating requirements associated with GRSAC and CBPS 01 and 02 does not necessarily imply the creation of a new management system, a parallel reporting structure, or a restructuring of financial institutions’ business models. The main benefit of the CMN resolutions lies in integrating new information into existing processes, ensuring that social, environmental, and climate factors are considered within the analytical frameworks used for other types of risk.
