In depth

Relevant aspects of the EC include the following:

Amendments to the CBJ: The SFC modified Sections 3.1.4 and 3.2 of Chapter IV, Title I, Part I of the CBJ, incorporating into the risk management policies and activities of the Internal Control System those related to the management of environmental and social risks, including climate-related risks.

On Chapter XXXIII of the CBCF – Key aspects

1. Scope of application: The instructions set forth in this chapter shall be applicable to entities supervised by the SFC, except for those exempted under subsection 1.2.1¹ of Chapter XXXI, Part I, of the CBCF, and with respect to products, services, and operations that are exposed to environmental, social, and climate-related risks (“Risks”). In any case, these instructions do not limit or exclude the provision of financial products and services as noted by the SFC in the Circular.
2. Implementation of policies and procedures: Supervised entities shall implement policies and procedures to identify, measure, control, and monitor the Risks, based on their potential impact on the entity’s financial condition and the resilience of its business model in the short, medium, and long term.
3. Relevant definitions: The Circular defines social and environmental risk factors, including climate-related risks, as well as the factors that influence the latter. Social risk factors include situations such as armed conflict, public order disturbances, and involuntary resettlement, among others. Environmental risk factors include those that may generate negative impacts due to biodiversity loss, depletion of natural capital and resources, among other aspects.
4. Principle of proportionality: The management of Risks must be based on reasonable and available information for each entity and must be consistent with entities' risk profile and their risk appetite framework, business plan, strategic planning, nature, size, complexity, and activities, while also considering the principle of relevance. In application of this principle, the new Chapter of the CBCF establishes that:
   1. Credit Institutions such as Banks must manage Risks associated with credit products (credit).
   2. Insurance Companies must assess Risks when evaluating underwriting risk and manage the Risks with respect to the investments backing their technical reserves.
   3. Entities that manage third-party funds (e.g., brokerage firms or trust companies) must manage Risks related to proprietary transactions only.
   4. Pension Fund Administrators and Mutual Investment Funds must manage Risks within their investment processes.
5. Principle of relevance: Entities are not required to apply environmental, social, and climate risk management policies or procedures to products, services, and investment activities involving clients, users, territories, or economic sectors with low exposure to such Risks. Entities may define materiality thresholds to determine which products, services, and investment activities may be excluded from the management of these Risks.
6. Risk management stages: Entities must conduct activities related to the following stages in the Risks management process: (i) identification; (ii) measurement; (iii) control; and (iv) monitoring.
7. Internal training: Entities must adopt training plans on the Risks, which shall be directed to the personnel responsible for risk management, senior management, and the Board of Directors.
8. Reporting obligation: Personnel responsible for the risk management function must submit an annual report (unless a shorter reporting frequency is established) to the Board of Directors and Senior Management. Additionally, such reports must be made available to the SFC.
9. Specific guidelines for credit operations as set forth in Section II of Chapter XXXIII:
   1. The Circular establishes specific guidelines regarding Risks in credit transactions, which are applicable to the following entities: (i) banking institutions; (ii) financial corporations; (iii) finance companies; (iv) higher-level cooperative organizations; among others.
   2. These entities must define an initial filter (filtro inicial) mechanism composed of a set of criteria, which serves as the basis for determining the applicability of the provisions related to Risk management in credit operations. The information related to the initial screening must be made available to the SFC.
   3. The Circular outlines the following phases for Risks management in credit transactions, which shall apply only to credit transactions that surpass the initial screening: (i) risk categorization; (ii) risk assessment; (iii) monitoring; and (iv) reporting.
   4. Additionally, it establishes the obligation for those responsible for the risk management function to submit a semi-annual report to the Board of Directors and senior management. These reports must be documented and made available to the SFC.

Current situation

1. The provisions set forth in the Circular must be implemented within a maximum period of 18 months from the date of its publication. However, supervised entities to which these provisions apply must submit an implementation plan to the SFC within six months following the issuance of the Circular.
2. Supervised entities may implement the instructions prior to the expiration of the deadlines, in which case they may, at the SFC’s discretion, receive public recognition.

Spanish version

1 (A) Financial holdings that do not directly engage in financial, insurance, securities, or other activities related to the management, use, or investment of funds collected from the public; Electronic Deposit and Payment Companies (Sociedades de Depósitos y Pagos Electrónicos - SEDPE); representative offices of foreign financial institutions in Colombia; foreign reinsurers operating in Colombia; and Regional Development and Promotion Institutes (Institutos de Fomento y Desarrollo Regional -INFIS), and (B) Insurance and reinsurance brokerage companies; general warehousing companies; foreign exchange and special financial services intermediaries; self-regulatory organizations; stock exchanges; central securities depository management companies; securities rating agencies; central counterparty risk clearing houses; guarantee funds other than the National Guarantee Fund (Fondo Nacional de Garantías - FNG); low-value payment system administrators; agricultural commodity exchanges; foreign exchange trading and registration system administrators; securities trading and transaction registration system administrators; foreign exchange clearing and settlement system administrators; pricing providers for valuation purposes; the Central Bank of Colombia (Banco de la República); securitization companies; and companies engaged in crowdfunding activities (Sociedades que realicen la actividad de Financiación Colaborativa - SOFICO).