ESG Regulation in Insurance: SUSEP Circular 666/2022

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In effect since August 2022, Circular No. 666/2022, issued by the Superintendence of Private Insurance (SUSEP), consolidates a global trend in ESG (Environmental, Social, and Governance) regulation within the insurance sector, aligning Brazil with best practices for sustainability.

In recent years, the need for greater engagement by the insurance market in matters related to climate change, socio-environmental issues, and human rights has become increasingly evident, in order to promote a more sustainable economic and market paradigm. This underscores the significance of SUSEP’s Circular in the Brazilian context.

The social and human costs of the ongoing socio-environmental and climate crisis are already substantial. Recent figures indicate that approximately USD 250 billion in 2023 were associated with losses from natural and climate-related disasters, of which less than half (around USD 98 billion) were actually insured by companies and insurance entities.

In Brazil, the scenario is no different, with losses from climate-related disasters estimated at approximately USD 555 million. The insurance sector appears not to have fully grasped the urgency of the climate emergency. Moreover, recent incidents have involved insurers and insured activities linked to areas of illegal deforestation and potential violations of social rights.

In this context, insurance actors have never been more critical to the prevention, monitoring, and compensation of material and financial losses related to environmental, climate, social, and human rights risks. Circular 666/2022 from SUSEP is a step precisely in this direction, as reflected in its directives and requirements.

Published on June 27, 2022, and effective from August 1 of the same year, SUSEP Circular No. 666 established in Brazil the “Sustainability Requirements” to be complied with by insurance companies, open private pension entities (EAPCs), capitalization companies, and local reinsurers.

In summary, SUSEP’s regulation mandates compliance with four main sustainability requirements for insurance entities: 1) Sustainability Policy; 2) Sustainability Risk Management; 3) Sustainability Risk Materiality Study; and 4) Annual Sustainability Report.

1) SUSTAINABILITY POLICY

According to Article 8 of Circular 666, insurance entities must publish a Sustainability Policy that establishes principles and guidelines to ensure that sustainability aspects, including risks and opportunities, are considered in their business operations and stakeholder relationships.

The Policy should address:I - promotion of fundamental rights and common interests;II - environmental preservation;III - reduction of impacts from frequent or severe weather events or long-term environmental changes;IV - transition to a low-carbon economy; andV - promotion of a more resilient and inclusive society.

The Policy may also include stakeholder participation in the insurance company’s sustainability initiatives.

2) SUSTAINABILITY RISK MANAGEMENT

The second requirement, defined in Article 3 of Circular 666, is Sustainability Risk Management, which must be proportionate to the size of the supervised entity, the nature and complexity of its operations, and the materiality of the sustainability risks to which it is exposed.

Through this management, insurers must develop specific methodologies, processes, procedures, and controls to identify, assess, classify, measure, address, monitor, and report sustainability risks in a timely manner. Insurance entities must also establish limits on risk concentration and/or restrictions for conducting business that exposes economic sectors, geographic regions, or products to sustainability risks.

Sustainability risks are defined as losses caused by events related to climate change, low-carbon transition, environmental degradation, and violations of fundamental rights or acts detrimental to common interests or specific groups.

This Sustainability Risk Management framework may be integrated into existing Risk Management Structures (EGR) and Internal Control Systems (SCI) as required by CNSP Resolution 416/2021.

3) SUSTAINABILITY RISK MATERIALITY STUDY

The third requirement, outlined in Article 3, §1 of the Circular, is the Sustainability Risk Materiality Study. This study aims to identify, assess, and classify sustainability risks by materiality levels, taking into account the characteristics of the entity’s activities, operations, products, services, clients, suppliers, and service providers.

The Circular specifies that the classification of sustainability risks by materiality level should be based on the combined value of estimated probability and impact. A risk should be considered immaterial only if this value falls below the minimum relevance threshold defined by the insurance company.

4) ANNUAL SUSTAINABILITY REPORT

The fourth requirement is the publication of an Annual Sustainability Report. According to Article 15 of the Circular, insurers must disclose actions undertaken under the Sustainability Policy, highlighting any results achieved in the previous year and expected outcomes for the current year. The report must also detail the most relevant aspects of Sustainability Risk Management, emphasizing risks and control measures.

Deadlines for compliance with the Sustainability Policy for insurers across all segments (S1, S2, S3, and S4) have already passed. Deadlines for the disclosure of Risk Management and Materiality Studies for S1 (December 31, 2023) and S2 (February 28, 2024) insurers have also expired. For S3 and S4 segments, the publication of Sustainability Risk Management and Materiality Studies is due by April 30, 2024.

The Annual Sustainability Report must be published by June 30, 2024, for S1 insurers, and by June 30, 2025, for insurers in S2, S3, and S4 segments.

The sustainability requirements introduced by Circular 666 enter the insurance regulatory framework at a timely moment, both for insurers themselves and—most importantly—for the activities, projects, and investments they underwrite.

It is worth emphasizing that risk is at the core of insurance. Given the complexity of socio-environmental and climate-related challenges, factors such as claims frequency and coverage become even more uncertain and difficult to quantify. ESG risk frameworks and reporting, as required by SUSEP, therefore represent essential mechanisms for the insurance sector.

Despite the ongoing need for adaptation and effective adoption by the sector, ESG (Environmental, Social, and Governance) finds in SUSEP Circular 666/2022 an important sectoral regulatory tool for sustainability, integrating the insurance market—albeit belatedly—into the complex task of mitigating and managing risks and losses arising from socio-environmental and climate factors.

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Originally published on LinkedIn.

Author: Bruno Teixeira Peixoto