Established in 2015 at the request of the G20, the Task Force on Climate-related Financial Disclosures (TCFD) has promoted recommendations for climate change-related disclosures. In line with the TCFD's objective of making available consistent, comparable, clear, and efficient information on climate change and the recommendation to promote climate risk management, the Central Bank of Brazil issued, on November 21st of this year, BCB Normative Instruction 325 to standardize the way financial institutions should recognize sustainability assets on their balance sheets.

Sustainability assets are defined as those related to socio-environmental and climate sustainability mechanisms, and include carbon credit and decarbonization credit (CBIO) certificates.

The instruction changes  account headings of the accounting standards of institutions regulated by the Central Bank of Brazil (Cosif). Sustainability assets" are classified as "other non-financial assets" and "stock assets", depending on the use by the financial institution.

When acquired for investment purposes, sustainability assets are classified as "other non-financial assets" and must be accounted for at their fair value, with gains and losses recognized in balance sheets and carried through in the income statement. When acquired for internal use, such as for achieving sustainability goals, they are classified as "stock assets" and recorded at the lower of cost or fair value.

BCB Normative Instruction 325 also provides that any liabilities arising from legal obligations or commitments to social-environmental and climate sustainability must be recognized in the accounting headings intended for recording the provision for contingencies. The measure is important because it obliges financial institutions to account for carbon reduction or offsetting pledges in financial statements, which contributes to mitigating green washing.

According to a note from the Central Bank, the new standard seeks to provide greater transparency in accounting records for assets related to socio-environmental and climate sustainability mechanisms in view of the potential growth of these operations in the financial market. The new instruction applies to accounting documents prepared as of the base date of January of 2023.

BCB Normative Instruction 325 therefore helps financial institutions to adopt standardization of sustainability assets. In addition to producing comparable information, the new standard stimulates increased trading of these assets in the financial market by requiring that provisions be made for sustainability goals.