ESG Newsletter | Central Bank of Brazil amends COSIF in recognition of the effects stemming from certain socioenvironmental mechanisms

[vc_row css=”.vc_custom_1655220644729{margin-top: 0px !important;margin-right: 0px !important;margin-bottom: 0px !important;margin-left: 0px !important;}”][vc_column][vc_column_text]On November 21, the Central Bank of Brazil (“BCB”) enacted BCB Normative Instruction No. 325/2022 to amend BCB Normative Instruction No. 268/2022, which defines the accounting record in the account plan of the Accounting Standard for Institutions Regulated by BCB (“Cosif”), to also provide for the registry of climate and socio-environmental sustainable investing assets, including Carbon Credit certificates.

The new rule allocates a specific accounting subtitle for the registration of assets related to socio-environmental and climate sustainability mechanisms, such as Carbon Credit and Decarbonization Credit (“CBIO”) certificates, given the increasing demand and growth potential of such operations in the Brazilian financial market.

In this regard, the BCB seeks to establish transparency in the use of sustainable investing assets, by standardizing its accounting record. Consequently, the BCB will also be able to monitor assets held by institutions in their investment portfolios, thus overseeing the progress of the market and adopting any necessary measures, in a timely manner.

The classification of sustainable investing assets will depend on the institution’s management strategy.

• Assets acquired for the purpose of generating profit from its future sale, according to market price variations, will be measured at fair value, according to CMN Resolution No. 4,967/2021.
  
• However, assets acquired for use in the institution’s activities must be measured according to the lowest value between the acquisition cost and the fair value, as established by CMN Resolution No. 4,924/2021.

Conversely, DENOR BCB Normative Instruction No. 325/2022 amended BCB Normative Instruction No. 271/2022, so that potential legal or non-formalized obligations related to socio-environmental and climate sustainability mechanisms that affect the institution must be registered in the accounting titles allocated for the provision of contingencies.

Finally, the BCB established criteria for recording and measuring these assets based on international best practices. As a result, such assets will be issued in alignment with the reduction of disparities between Cosif and the International Accounting Standards Board (“IASB”) guidelines.

The Normative Instruction will enter into force on January 01, 2023.

Demarest’s Banking and Finance, ESG, and Tax teams are available to provide any further clarifications that may be necessary.[/vc_column_text][/vc_column][/vc_row]