Financial authorities are increasingly fostering the sustainable finance agenda in Mexico, despite still having few regulatory measures in place. Most actions have concentrated on raising awareness and developing capacities of financial institutions to integrate sustainability factors in decision-making.
After having participated in the G20 Sustainable Finance Working Group in 2016, Banco de México decided to join seven other central banks as founding members of the Network for the Greening of the Financial System in 2017. Being part of NGFS was key for Banco de México to develop a good understanding of climate-related risks and their potential impact on financial markets.
Launching Mexico’s sustainable finance roadmap
In 2019, with the support of UNEP FI, Banco de México decided to undertake a study to assess the degree of awareness of Mexican financial institutions regarding climate, environmental, and social related risks, as well as financial institutions’ capacities to assess and manage these risks.
A total of 66 questionnaires were completed, covering 28 credit institutions and 38 asset managers and asset owners – a significant share of the financial system. The study included 40 interviews in which senior managers had the opportunity to clarify questions and express their opinions at length. The questionnaire included more than 60 questions, covering three main sections: governance, strategy, and risk management practices in relation to climate, environmental, social and governance risks.
A key success factor to diagnosing Mexico’s sustainability risk was the direct involvement of the Governor of Banco de México in convening senior managers of financial institutions to the interviews. This sent a clear message on the relevance of the project to market participants. As a result, the interviews with senior managers provided a unique opportunity to raise awareness on the issue of climate risks.
Results were presented in Climate and Environmental Risks and Opportunities in Mexico's Financial System - from Diagnosis to Action (available in both English and Spanish), which was launched by the Governor of Banco de México in May 2020.
Each section includes a set of drivers, challenges, and recommendations to better align financial flows with the development of an environmental and socially responsible agenda and low-carbon economy. The report is a call to action particularly for CEOs and boards of directors of financial institutions to:
- Incorporate environmental and social risks and opportunities into their risk assessment and management strategies,
- Reinforce internal policies, and
- Develop internal competencies to assess physical and transition risks associated with climate change and environmental degradation.
Roadmap progress: Building an institutional framework
In 2020, in line with the main recommendations of the report, Banco de México proposed the creation of the Sustainable Finance Committee within the Financial System Stability Council (CESF). The committee is chaired by the Ministry of Finance, and Banco de México acts as Secretariat. All Mexican financial authorities participate as members, and the chairs of the main financial sector associations as observers.
The CESF’s Sustainable Finance Committee has set out specific plans for its four working groups. These groups have been assigned the following objectives:
- Sustainable finance taxonomy. Develop a sustainable finance taxonomy, in line with the UN Sustainable Development Goals. This group is led by Mexico’s Ministry of Finance.
- Climate and ESG risk. Integrate climate and environmental, social and governance (ESG) risk factors in supervisory and financial market activities, by supporting a wider adoption of environmental risk management systems in financial institutions, as well as preparing authorities and financial institutions to undertake scenario analysis. This group is led by Banco de México.
- Sustainability disclosure and reporting. Improve the amount and quality of disclosures and reporting by non-financial and financial institutions, in line with frameworks and standards, such as TCFD, SASB, and the recently created International Sustainability Standards Board. As a first step, reporting on how they take into consideration ESG factors in decision-making will be mandatory for pension funds in 2022. This group is led by Mexico’s Securities and Banking Commission.
- Sustainable capital mobilization. Enable conditions to increase sustainable capital mobilization by identifying barriers that limit issuance of securities linked to sustainability, and by sharing best practices among market participants. This group is led by the Pension Fund Industry Supervisor.
Banco de México and the Sustainable Finance Committee (SFC) are leading a financial education and capacity-building programme on the topic of ESG disclosures and climate risk analysis, targeting financial authorities and financial market participants. Through this effort, they are looking to align disclosure of climate and environmental information by companies and financial institutions with forthcoming International Sustainability Standards Board (ISSB) sustainability reporting standards. In addition, they are assessing the regulatory framework for gradual implementation of ESG material factors.
Although there is still progress to be made, establishing a clear institutional framework to foster Mexico’s sustainable finance agenda seems to facilitate communication and send a clear message to market participants on the road ahead. Private sector financial institutions actively participate in the working groups and can engage with financial authorities in an open dialogue, as well as hear the perspectives academia and NGO experts on specific working group topics.
In setting out a roadmap for sustainable finance, having access to market and regulatory best practices at an international level has been key to providing a solid basis for next steps. SFC members are actively engaged in international fora: Mexico’s Ministry of Finance and Banco de México participate in the Sustainable Finance Working Group of the G20; Banco de México and the securities banking commission are active NGFS members; and the Green Finance Advisory Council (CCFV) is an active member of the Financial Centres for Sustainability (FC4S) network.
On the right track: Financial risk management survey results
In 2021, as part of a conventional risk management survey, financial institutions were asked about the actions that have been carried out to manage climate risks (i.e. physical, transition and reputational). About 57% of surveyed institutions confirmed having already analysed their exposures to climate related risks (compared to 36% in 2019), and 18% planned to do so during the next 12 months. The main methods used to measure risk exposure were scenario analysis and stress testing.
The same survey asked financial institutions about their position regarding the adoption of the Task Force on Climate Related Financial Disclosures (TCFD) recommendations: 47% of institutions are still analysing whether to implement the recommendations, 20% will implement the recommendations in 2021 and 2022 (compared to 19% in 2019), less than 1% did not implement them, and 23% do not have knowledge of them.
The TCFD Mexico Consortium
Finally, a noteworthy development for the support of the sustainable finance agenda was the formal launch of the TCFD Mexico Consortium in 2021. Inspired by the success of the TCFD Consortium in Japan, this private sector initiative aims to promote adoption of TCFD recommendations by raising awareness among financial and non-financial organizations, as well as through dialogue with information users.
The TCFD Mexico Consortium will initially focus on the following objectives:
- Raise awareness and disseminate the importance of financial aspects related to climate change, as well as standardize knowledge about climate risk in accordance with the recommendations of the TCFD.
- Promote dialogue between financial and non-financial institutions (e.g., information preparers) and information users (e.g., investors and financial institutions) through the development of workshops, conferences, publications, and guides.
- Promote best practices in goal setting, carbon footprinting and portfolio alignment, climate scenario analysis, transition plans, and outreach.
This blog builds on Climate and Environmental Risks and Opportunities in Mexico's Financial System from Diagnosis to Action, Mexico's Sustainable Finance Roadmap as part of the GEF Aligning Finance Policies project.
Continue the conversation on the Green Forum Sustainable Finance Discussion.