Risk Management Strategies for Financial Institutions in Mexico Take Center Stage

A new report released by Banco de México and the United Nations has highlighted the urgent need for Mexican financial institutions to incorporate environmental issues into their risk assessment and corporate governance strategies.

Climate and Environmental Risks and Opportunities in Mexico’s Financial System: From Diagnosis to Action

The report, titled “Climate and Environmental Risks and Opportunities in Mexico’s Financial System: From Diagnosis to Action,” is a comprehensive diagnosis of the current state of readiness among Mexican financial institutions in assessing climate, environmental, and social risks.

Key Findings

According to the study, which surveyed senior management at over 60 institutions:

Nearly 90% of the credit portfolio of the banking system is not adequately prepared to address environmental and social risks.
80% of assets reported by fund managers are not adequately prepared to address these risks.
90% of assets managed by retirement funds administrators are not adequately prepared to address these risks.
44% of assets reported by insurance companies are not adequately prepared to address environmental and social risks.

Recommendations

The study recommends that financial institutions:

Develop scenario analysis capabilities and strategies to better understand and manage relevant social and environmental data.
Set up the proper competencies to process this data and put in place disclosure and transparency policies.
Reinforce governance competencies and set out a roadmap at the board level to integrate Environmental, Social, and Governance (ESG) risks and opportunities into mainstream risk management and business strategies.

Response from International Organizations

The report’s findings were welcomed by:

Inger Andersen, Executive Director of UNEP: “It is clear that we need to manage risk far better than we currently do, and this becomes more vital in the context of climate change which remains the existential challenge facing humanity.”
UNDP Administrator Achim Steiner: “The financial sector’s role in tackling environmental degradation is critical. The report’s recommendations for clear timelines and commitments at the board level to incorporate social and environmental aspects into major plans of action are essential.”

Commitment from Banco de México

Governor of Banco de México Alejandro Díaz de León expressed his confidence that the report will serve as a basis for the development and implementation of standardized methodologies and criteria in the evaluation of environmental and social risks, essential for long-term prosperity. The initiative is seen as a collective effort by all actors in the financial system to address the critical challenges of climate change and environmental degradation.

Conclusion

The report emphasizes the urgent need for Mexican financial institutions to incorporate environmental issues into their risk assessment and corporate governance strategies. With nearly 90% of the credit portfolio not adequately prepared to address environmental and social risks, it is crucial that financial institutions develop scenario analysis capabilities and strategies to better understand and manage these risks. The report’s recommendations provide a roadmap for financial institutions to integrate ESG risks and opportunities into mainstream risk management and business strategies.