Risk Management Strategies for Financial Institutions in Mexico: A Call to Action
Mexican financial institutions are facing a critical challenge: how to effectively manage climate, environmental, and social (CES) risks while capitalizing on the opportunities arising from the transition to a low-carbon economy.
The Current State of Affairs
A recent survey of 66 financial institutions in Mexico reveals that many are not adequately prepared to address these risks. While senior managers recognize the importance of CES risks, few have implemented effective risk management strategies. Only half of credit institutions and a third of asset managers consider climate-related events as financially material risks.
Key Areas for Improvement
The survey highlighted several key areas where financial institutions in Mexico need to improve:
- Governance: Few have built competencies at the board level to address CES risks.
- Risk strategy: Few incorporate CES risks into their mainstream risk management strategies. Only a minority assess physical, transition, and reputation risks.
- Risk management capabilities: Many lack the capacity to properly identify, process, and incorporate relevant data into their risk analysis processes.
Recommendations for CEOs and Board Members
To address these gaps, UNEP FI recommends that CEOs and board members of financial institutions in Mexico:
- Adopt the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
- Establish capacities throughout the entire organization to analyze CES risks and opportunities.
- Set timelines and commitments to incorporate ESG considerations into major plans of action, credit, asset allocation, and risk management policies.
- Include material ESG considerations in performance objectives and define specific reporting indicators.
- Adopt forward-lookng tools to analyze physical and transition risks and apply stress tests to different climate pathways.
The Consequences of Inaction
The report concludes that the costs to society will be larger if financial institutions do not internalize the negative externalities associated with CES risks. It is therefore crucial for CEOs and board members of financial institutions in Mexico to take immediate action to incorporate CES risks and opportunities into their risk assessment and management strategies.
The Benefits of Action
By adopting these recommendations, Mexican financial institutions can position themselves as leaders in responsible finance and contribute to a more sustainable future for the country.