Environmental responsibility of the banking sector: incorporation of environmental risk in the credit process

Abstract

Financial institutions' activities are surrounded by risks. These risks include market, credit, operational, legal, and image risks. Environmental risk has gained prominence lately, and it has to be added to that list. This prominence has originated mainly from legal battles that culminated in the condemnation of US banks for environmental damage caused by borrowers. In Brazil, to regulate financial institutions in the subject, the Central Bank of Brazil (BCB) issued Resolution No. 4,327/2014. It required that each financial institution submits its Social and Environmental Responsibility Policy - PRSA to the BCB. This paper investigates the incorporation of environmental risks in the credit process by Brazilian banking institutions. To achieve our objectives, we conducted qualitative research using the 2016 and 2017 Sustainability Reports of the five largest banks in the country. In these Reports, we search for the terms “environmental risk,” “environmental risks,” “socioenvironmental risk,” and “socioenvironmental risks” concerning the credit process. Accomplished results were classified into eleven categories to homogenize the findings and facilitate their analyses. Our results indicated that social and environmental risks are selectively incorporated into the credit process. This incorporation is guided by compliance with legal obligations, the likelihood of events that may cause financial losses, and the amounts involved. Concerning low-value credit operations, it was observed that, in general, banks are exposed to social and environmental risks, albeit in a scattered manner. The exception is credit for certain activities, such as agricultural production - as they are considered potentially impactful - and some specific types of credit lines such as real estate financing.