Around 50 representatives of 15 commercial banks and 2 mexican development banks, as well as representatives of regulators of the financial sector in Mexico including the Bank of Mexico (Banxico) and the National Banking and Securities Commission (CNBV), with knowledge and tools that would allow them to take demonstrable measures to integrate the analysis of environmental scenarios into financial risk management frameworks.
Within the framework of the Memorandum of Understanding (MOU) between the Mexican-German Climate Change Program of the German Cooperation for Sustainable Development (GIZ) and the Banks of Mexico Association (ABM), with special support from the Bank of Mexico, the training workshop on environmental, climatic and social risk management and the incorporation of Environmental Scenario Analysis into the risk management systems of banks in Mexico was developed.
The workshop was held on October 29th, 30th and 31st, 2019 at the headquarters of the Banks of Mexico Association, with the aim of strengthening and developing capacities, knowledge and tools for financial institutions and regulators in Mexico that allow them to take demonstrable measures to integrate the analysis of environmental scenarios into their daily activities. This workshop was given by the consultant Acclimatise and was attended by around 50 participants each day, who were representatives of the areas of sustainability, risks (operational and credit), of 15 commercial banks and two development banks in Mexico. Representatives of the Bank of Mexico and the National Banking and Securities Commission, important regulatory authorities of the country’s financial sector, also participated.
The importance of this workshop is that, for the third consecutive year, the Global Risk Report (GRP) of the 2019 World Economic Forum indicated that among the five main global risks by probability and impact are risks related to environmental sources, more specifically extreme weather events, natural disasters and failures in mitigation and adaptation to climate change. This means that the risks related to climate change are very significant and affect most sectors and industry and economic organizations, including the financial sector.
In that sense, it is evident the need to strengthen the capacity of mexican banks by providing them with the necessary knowledge and tools that contribute to assess, measure and better understand climate-related risks in their business portfolios, under a variety of future climate scenarios.
In this regard, attendees were trained in various aspects such as:
They also learned practical examples of systematic methodologies for managing environmental and social risks such as the MEDIRSE and H-ARAS tools developed by BANCOMEXT and CITIBANAMEX respectively, which are used for the development and implementation of a comprehensive management framework to identify, evaluate and manage environmental and social risks exposure in the credit evaluation.
Credits: GIZ: From left to right: Acclimatise, Director of BBVA Corporate Responsibility and Reputation (CRR), Director of Sustainability of Grupo Banorte, Corporate Sustainability Manager of CEMEX, Acclimatise.
In addition, the experience of the BBVA, Grupo BANORTE and CEMEX on the part of the production sector was shared, through a panel in which representatives from the sustainability and corporate responsibility departments discussed how they have addressed the issue of climate risks management and the taskforce on Climate-Related Financial Disclosures (TCFD) provided recommendations focused on 4 pillars: the governance of the organization, strategic planning, risk management, and objectives and metrics through indicators that include climate risks, and performance against them.
As a result of this series of group discussions and development of group exercises, areas of opportunity were identified, as well as the main challenges and barriers for the integration of environmental risks, social risks, physical climatic risks and transitional climatic risks in the analysis of various financial operations, and the implementation of the Environmental Scenario Analysis. It was highlighted that climate risks have distinctive characteristics compared to other risks, and, therefore, have to be considered and managed in financial operations, as they can impact the economy and become a source of potential instability of the financial system.
Regarding the TCFD recommendations, the attendees acknowledged that the most difficult part to implement are those related to the governance of the organization and strategic planning, given the great challenge to sensitize senior managers of financial organizations about integrating climate risks into decision-making process. This, together with the joint effort and coordination of all internal areas (risks, portfolio, sustainability, social responsibility, etc.) involved, as well as the financial sector as a whole, were identified as the first concrete actions necessary to implement climate risks in banks, in synergy with the development of capacities and exchange of knowledge and methodologies with more experienced organizations on the subject, as well as the sector advancement in regulatory and legal dispositions at national level.
Finally, the next steps on the agenda, for both, the Mexican-German Climate Change Alliance program and the IDB, together with the ABM and financial regulators, are continuing to join forces and making alliances to support the latent need to strengthen training and guidance mechanisms to transform and re-green the financial system, with the final objective of directly contributing to the fulfillment of Mexico’s Climate Change mitigation and adaptation goals established in its NDCs; and, in addition, building a key sector that promotes the transformation at medium and long term for low carbon, resilient and sustainable economic development in the country.
For the next year, it is expected for these spaces for learning, reflection and joint work to have a broader framework of action that involves more staff of financial institutions, and ideally senior managers of the board of directors of these organizations, to set the bases of a long-term relationship and technical cooperation.