Mexico’s Financial Institutions Face Climate Risks and Opportunities

As Mexico commits to reducing greenhouse gas emissions by 22% by 2030 under the Paris Agreement, its financial institutions are grappling with the impact of climate change on their businesses.

The Challenge Ahead

A new study conducted by the Banco de México and the United Nations Environment Programme reveals that while most financial institutions recognize the importance of environmental and social risk management systems, only half consider climate risks to be financially material. The study surveyed 66 financial institutions in Mexico, including pension funds, asset managers, asset owners, and credit institutions.

Climate Risks in Mexico

Coastal Consequences

Rising sea levels are expected to increase coastal floods, leading to increased costs for housing and infrastructure.
Ports and communication networks may also be affected, impacting trade and tourism.
Salinization of agricultural land could reduce crop yields, while vector-borne diseases, heat waves, and gastrointestinal diseases may become more prevalent.

Water Security Challenges

Increased rainfall in some areas is expected, but droughts are also becoming more frequent.
Fluvial floods may impact agriculture, while urban water security becomes a growing concern.

Economic Opportunities

The transition to a low-carbon economy presents opportunities for financial institutions, including:

Investments in clean energy generation, energy efficiency, and biofuels.
Sectors such as manufacturing, waste management, and agriculture can also benefit from sustainable practices.

Governance Gaps

While most institutions have environmental and social risk management systems in place, only a few believe setting up these systems is crucial for reducing exposure to environmental, social, and reputational risks. The report highlights the need for greater board oversight and senior management involvement in understanding and managing these risks.

Recommendations

To better align financial flows with an environmentally responsible agenda and low-carbon economy, the study recommends:

Strengthening governance architecture.
Integrating environmental and social risks into mainstream risk strategies.
Developing tools and capabilities to assess and manage these risks.
Improving access to relevant environmental information.

Conclusion

By acknowledging the challenges and opportunities presented by climate change, financial institutions can position themselves for long-term growth and sustainability. The report provides a comprehensive diagnosis of the readiness of financial institutions in Mexico to address environmental and climate risks, offering insights for senior management and policymakers.