Sustainable business is increasingly gaining a different focus in the financial markets due to the risk of environmental damage, such as climate damage, resulting in financial losses and threatening the stability of the financial system, as well as causing material economic and social impacts.
In light of this, the Brazilian financial market and regulatory agencies, such as the Superintendence of Private Insurance (“SUSEP“), are incorporating ESG (Environmental, Social and Governance) criteria and practices into their frameworks and policies.
Among the main topics under discussion are climate change and the need for greater and better understanding of pricing climate risks, in order to promote a more efficient allocation of capital and to pevent abrupt adjustments that may result in disruption in the financial system.
In this context, SUSEP published Public Consultation Notice 44/2021/SUSEP, proposing a draft of a Circular on sustainability requirements to be complied with by insurance companies, EAPCs, capitalization companies and local reinsurers, given their role in the insurance industry as both risk manager and taker, and as investor, as well as taking into account their duty to promote sustainable economic and social development, especially when considering such entities’ qualification to carry out risk assessment and pricing.
Among the relevant aspects introduced by the proposed Circular are the following definitions:
- sustainability risks, defined as the set of climate, environmental and social risks. Sustainability risks include events that affect the supervised entity itself or its stakeholders and have the potential to impact the supervised entity’s operations, affect the demand for its products or services or result in unfavorable variations in the value of its assets or liabilities;
- environmental risks, corresponding to the possibility of losses caused by events due to acts or activities that degrade the environment, including the excessive use of natural resources, or environmental disasters resulting from human intervention; and
- social risks, which involve the possibility of losses caused by events due to violation of fundamental rights and guarantees or by acts that are harmful to the common interest.
In addition, the proposed Circular also establishes the subdivision and categorization of climate risks:
- physical – the possibility of losses caused by events associated with frequent and severe weather or long-term environmental changes that can be related to changes in weather patterns;
- of transition – the possibility of losses caused by events associated with the process of transition to a low carbon economy, by which the emission of greenhouse gases is reduced or compensated and the natural mechanisms for capturing these gases are preserved; and
- of litigation – possibility of losses caused by claims in liability insurance or direct lawsuits against the supervised entity, due to failures in the management of physical or transitional climate risks.
As for the form of management of these sustainability risks, the draft propose that such risks are inserted into the general context of the Internal Control System (Brazilian acronym “SCI“) and the Risk Management Structure (Brazilian acronym “EGR“), imputing responsibility to the supervised entity, in a complementary manner:
- to adopt specific processes, procedures and controls to identify, evaluate, measure, handle, monitor and report, in a timely manner, the sustainability risks to which it is exposed;
- to establish, when appropriate, limits for risk concentration and/or restrictions on doing business that include the exposure of economic sectors, geographic regions, products or services to sustainability risks;
- in the case of supervised entities classified as S1 and S2, to record the relevant information for the management of sustainability risks, and to incorporate in their methodologies quantitative risk measurement and projections, which include events associated with sustainability risks; and
- to implement, where appropriate, criteria and procedures for pricing and underwriting of risks, with or without the imposition of special considerations, taking into account at least: (i) the client’s history and commitment to managing sustainability risks; (ii) the client’s ability and readiness to mitigate such risks associated with the transaction; (iii) any applicable restrictions or limits.
Another important aspect is the obligation of the supervised entity to have a sustainability policy that establishes principles and guidelines aimed at ensuring that sustainability aspects, including risks and opportunities, are considered in the carrying out of its business and in its relationship with interested parties.
In addition, the proposed draft Circular establishes that the supervised entity should prepare and issue, by April 30 of each fiscal year, a sustainability report, demonstrating, at least, the actions related to the sustainability policy and relevant aspects related to the management of sustainability risks. Exceptionally, the first sustainability report, concerning the base date of December 31, 2022, may be prepared and issued by June 30, 2023.
The complete draft of the Circular can be accessed through this link. Interested parties can send their comments and suggestions on the text by means of an electronic message addressed to email@example.com, until March 7, 2022, by means of a specific standardized form.
Demarest’s Insurance, Environmental Law and ESG practices will monitor the development of this public consultation until the final text is published and are available to support with more information and in the definition of possible measures to be adopted on a case-by-case basis.