ESG in financial services: PCAF, IFRS S2, CVM 193 and what changes

The new regulatory environment for financial services (CVM 193, PCAF, Net-Zero Banking Alliance)

Brazil's financial sector is going through an unprecedented regulatory shift on the climate agenda. Three forces are converging at once.

CVM 193 established sustainability reporting aligned with IFRS S1 and S2 for listed companies; CVM 244 revised the timetable, making adoption voluntary. Even so, banks, insurers and asset managers with shares or bonds listed on B3 face investor pressure to report climate risks and opportunities to the IFRS standard, including scenario analysis, emission metrics and reduction targets.

PCAF, the Partnership for Carbon Accounting Financials, is the global standard for measuring financed emissions, the emissions associated with lending, investment and insurance underwriting portfolios. More than 500 financial institutions worldwide have adopted PCAF, including large Brazilian banks. Brazil's central bank recommends PCAF as the methodological reference.

The Net-Zero Banking Alliance (NZBA) and the Net-Zero Asset Managers initiative (NZAMI) are voluntary commitments requiring portfolio decarbonisation targets aligned with the Paris Agreement. Signatories have to publish interim targets for priority sectors and show annual progress.

Together these create a cycle: measure (PCAF), report (CVM 193 / IFRS S2) and act (NZBA / NZAMI). An institution that does not measure cannot report. One that does not report cannot demonstrate progress. And one that cannot demonstrate progress loses credibility with investors, regulators and clients.

Financed emissions: what they are and how to measure them (PCAF)

Financed emissions are the GHG emissions associated with a financial institution's lending, investment and underwriting. They correspond to Category 15 of GHG Protocol Scope 3 and are by far the largest emissions source of any bank, typically 100 to 700 times larger than Scopes 1 and 2 combined.

PCAF defines methodologies for seven asset classes.

Corporate loans and finance. The financed emission is calculated as the financed company's emissions multiplied by an attribution factor (the loan value divided by the company's value, EVIC or revenue). If the bank lent R$ 100 million to a company with an EVIC of R$ 1 billion and emissions of 500,000 tCO2e, the financed emission is 50,000 tCO2e.

Real estate finance. For residential and commercial mortgages, PCAF uses the building's energy performance (energy use per m²) and the grid emission factor. Energy Performance Certificate data is ideal, but availability in Brazil is limited.

Motor vehicle loans. Emissions based on vehicle type, fuel and estimated mileage. The attribution factor considers the financed amount relative to the vehicle's value.

Project finance. For infrastructure, energy and industrial projects, the whole project's emissions are attributed in proportion to the bank's share of the financing.

Listed investments (equity and corporate bonds). Similar to corporate lending, using EVIC and the investee's emissions.

Sovereign debt. Emissions associated with government bonds, based on the issuing country's per capita or sectoral national emissions.

Insurance (underwriting). Emissions associated with corporate insurance policies, based on the insured company's emissions and the insurer's share of the risk.

IFRS S2 reporting as the reference standard for listed companies

IFRS S2 (Climate-related Disclosures) sets the global standard for disclosing climate risks and opportunities, adopted in Brazil through CVM 193. For financial services the requirements are especially broad.

Governance. The institution has to describe how the board oversees climate risk, including board competencies, how often it is discussed, integration with risk management, and remuneration tied to climate targets.

Strategy. Disclosure of how climate risks and opportunities affect the business model, strategy and financial planning. For banks, that includes analysing how transition risks (carbon pricing, regulatory change) and physical risks (extreme events, sea level rise) affect the loan book.

Scenario analysis. IFRS S2 requires an analysis of the strategy's resilience under different climate scenarios. The NGFS (Network for Greening the Financial System) publishes reference scenarios used by Brazil's central bank in climate stress tests.

Metrics and targets. Scope 1, 2 and 3 emissions (financed emissions included), portfolio carbon intensity, share of assets aligned with Paris, exposure to high-carbon sectors, and decarbonisation targets with a defined time horizon.

The challenge for Brazilian financial institutions is data availability. Many financed companies, particularly SMEs, have no emissions inventory. Without that data, the bank has to use sector estimates (PCAF score 4 or 5), which are less precise and harder to defend before regulators and investors.

CDP Financial Services

CDP runs a questionnaire specific to financial institutions that goes beyond the standard corporate one.

Climate Change Questionnaire, Financial Services. It includes sections on financed emissions (aligned with PCAF), engagement with financed companies, portfolio decarbonisation strategy, exposure to transition and physical risk, and green financial products.

Differentiated scores. Financial institutions that do not report financed emissions or show value chain engagement rarely achieve A or A- scores. CDP expects progressive measurement and sector decarbonisation targets.

CDP Supply Chain, financial version. Banks can use the CDP Supply Chain programme to ask financed companies to report emissions to CDP. That improves data quality (the PCAF score) and demonstrates active engagement.

The Brazilian Sustainable Taxonomy and green financial products

The Brazilian Sustainable Taxonomy will directly affect how financial products are classified.

Portfolio classification. Banks will be able to classify each loan and investment as aligned, in transition, or not aligned with the taxonomy. That makes it possible to calculate the Green Asset Ratio (GAR), the share of the portfolio invested in sustainable activities.

Green and sustainable bonds. The taxonomy will standardise eligibility criteria for Brazilian green bonds, replacing proprietary frameworks with verifiable technical criteria. International investors following the EU Taxonomy will have comparable parameters.

Green credit lines. Banks offering differentiated rates for sustainable projects will need objective eligibility criteria. The taxonomy provides them, reducing greenwashing risk and simplifying origination.

Investment funds. Managers classifying funds as ESG or sustainable will have to demonstrate alignment with the taxonomy. The Brazilian securities regulator has already signalled specific rules to prevent naming without substance.

Climate risk and NGFS scenarios

Climate risk management is the most advanced technical frontier for financial services.

Physical risk. The direct impact of climate events, droughts, floods, fires, cyclones, sea level rise, on financed assets. For a bank with a mortgage book concentrated in coastal cities, physical risk is tangible and quantifiable. The IPCC projects rising frequency and intensity of extreme events, with a direct impact on credit loss provisions.

Transition risk. The indirect impact of the shift to a low-carbon economy: tighter regulation (SBCE, CBAM), technological change (electrification, renewables), shifting consumer behaviour, carbon pricing. Companies in carbon-intensive sectors that fail to adapt can see revenue fall, costs rise and assets lose value (stranded assets).

NGFS scenarios. The Network for Greening the Financial System publishes macroeconomic scenarios integrating climate variables with financial models. They range from an orderly transition, with gradual policy, to a hot house world with insufficient climate action. Brazil's central bank uses NGFS scenarios in mandatory climate stress tests for large institutions.

The central bank's climate stress test. BCB Resolution 139/2021 requires large institutions to run climate stress tests. The bank has to estimate credit losses, revenue variations and capital impact under different global warming and transition scenarios. Results are reported to the central bank and feed into prudential supervision.

How Mangue Tech serves financial services

Mangue Tech offers a specialised package for financial services, covering the full cycle of measurement, reporting and action.

PCAF implementation. The Mangue Tech team configures financed emissions calculation for every relevant asset class, using the latest PCAF methodology. The process covers portfolio mapping, data collection from financed companies, application of emission factors and calculation of attributed emissions.

Scope 1, 2 and 3 inventory. Beyond financed emissions, Mangue Tech calculates the institution's operational scopes: energy for branches and data centres, corporate travel, employee commuting and the other Scope 3 categories.

Reporting support. The platform produces reports aligned with IFRS S2, CDP Financial Services and central bank requirements. The data is structured to feed reporting forms directly, cutting rework.

Regulatory consulting. The consulting team supports interpretation of regulatory requirements (CVM 193, BCB, PCAF), the design of portfolio decarbonisation targets and preparation for the Brazilian Sustainable Taxonomy.