Green Financial Regulatory Policy for Latin America in the Aftermath of COVID-19

For over a year now, the COVID-19 pandemic has strained governments, economies and public health to within breaking point. In South America alone, there have been over 25 million recorded cases of COVID-19 and 679,376 deaths, with an outbreak in Brazil that is the third largest in the world. Amid this great human and economic suffering, Latin America also faces substantial risk of economic shock and exposure to socio-environmental conflicts, climate emergencies and long-term climate change.

How can Latin America best recover from the COVID-19 pandemic and address systemic weaknesses in the financial regulatory sector? What policy tools are available for financial regulators? How can climate risks be incorporated into Latin America’s financial regulatory policy moving forward?

In the fall of 2020, the Boston University Global Development Policy Center convened a Working Group of Latin American bank regulators, development bankers and related experts to review the financial regulatory policy toolbox available to regulators and map a way forward. A new report written by GDP Center Distinguished Scholar Daniel Schydlowsky summarizes the Working Group’s discussions and recommendations to green Latin America’s financial and regulatory policy in the aftermath of COVID-19.

Chief among the Working Group’s recommendations is that financial agents take into account not only the direct effects of their actions, but also the indirect effects and that the sector as a whole adopt policies that support the internalization of external risks. To this end, the Working Group recommends that an Environmental and Social Risk Management (ESRM) system be adopted and centralized throughout the design of financial regulatory policy in Latin America. Originally developed for application to the project finance industry and embodied in the Equator Principles, the application of an ESRM system on a compulsory basis across the financial system would ensure that any individual financier include in their evaluation the effect of a project’s activities not only on the enterprise financed, but also on its broader economic context. This includes considerations of project impacts to workers, their families and communities, suppliers and customers, as well as requirements for grievance procedures by workers, neighbors and others, and commitments for remedial action where socio-environmental harm can be anticipated.

At the same time, the ESRM system should be supported by other regulatory policy instruments specific to addressing particular climate risks. This is important for the short, medium and long-term environmental and climate policies, as well as policies concerned with responding to natural disasters. Recovering from the COVID-19 pandemic will also require designing specific policies that take into account the particular economic circumstances created by the pandemic.

Put together, the adoption of an ESRM system and targeted policy instruments would cumulate in financial regulation policies that can ensure the long-term soundness of the financial system and also contribute to the sustained evolution of the economy on a path more consistent with environmental requirements and climate change.

Case Studies of Environmental Risk Analysis Methodologies

This Occasional Paper presents a detailed and in-depth discussion of the tools and methodologies for Environmental Rish Analysis (ERA) through case studies conducted by over 30 organizations. This paper aims to inform the financial community of the ERA methodologies and inspire interested institutions to further develop or enhance them. Views expressed in the Occasional Paper are those of the individual authors and do not necessarily reflect the views of the members and observers of the NGFS.