Mexico’s Financial Institutions Must Act Now on Climate Risk Management
As the world grapples with the devastating impact of climate change, financial institutions in Mexico are being called upon to take immediate action to incorporate environmental and social risks into their risk management strategies.
A Wake-Up Call for Mexican Financial Institutions
A comprehensive survey conducted by Banco de México and the United Nations Environment Programme Finance Initiative (UNEP FI) in 2019 found that while many senior managers at Mexican financial institutions are aware of the importance of addressing climate-related risks, few have implemented robust systems to identify, assess, and mitigate these risks.
The Survey’s Key Findings
- Only half of credit institutions and a third of asset managers consider climate-related risks financially material.
- Despite this, the majority of financial institutions expect to be affected by physical and transition risks related to climate change within the next six years.
- Credit institutions are more likely to report being affected by physical risks, such as increased carbon taxes or changes in regulations governing the use of natural resources.
- Asset managers are more concerned about transition risks, including the impacts of overexploitation of natural resources or changes in wind patterns.
The Gap in Risk Management
The survey also found that many financial institutions lack the necessary competencies and systems to properly identify, assess, and incorporate environmental and social risks into their mainstream risk analysis processes. Specifically:
- Only 71% of credit institutions have implemented an Environmental and Social Risk Management System (ESRMS).
- Only 29% of asset managers have done so.
Recommendations for Action
To address this gap, the report recommends that financial institutions adopt the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and establish capacities throughout their organizations to analyze environmental and social risks. The report also calls for:
- Public disclosure of environmental and social risk analysis practices.
- Redefining board competencies and updating assessment policies.
A Call to Action
The survey’s findings are a call to action for CEOs and boards of directors at Mexican financial institutions to prioritize the incorporation of environmental and social risks into their risk assessments and management strategies. Delaying this process will only lead to larger costs to society in the long run, as negative externalities associated with climate change and environmental degradation are internalized.
Seizing Opportunities for Sustainable Growth
It is imperative that Mexico’s financial institutions take immediate action to address these risks and seize opportunities for sustainable growth. By doing so, they can not only mitigate the impacts of climate change but also contribute to a more resilient and sustainable future for all.