Study Reveals State of Climate Risk Management in LatAm and Caribbean Banks
A survey of 78 of the region’s financial institutions, representing more than half of the total assets managed, found that 38 percent of banks incorporate climate change-associated guidelines into their strategy, while less than a quarter have a policy consisting of assessing and disseminating climate risks.
The study titled “How Banks Incorporate Climate Change into Their Risk Management – 1st Survey in Latin America and the Caribbean,” developed by the UN Environment Program Financial Initiative (UNEP FI) and CAF—development bank of Latin America—, with the collaboration of the Latin American Federation of Banks (FELABAN), was presented today during a webinar.
In the survey, as many as 69 percent of banks indicated that the economic sectors perceived as most vulnerable to climate risks are agriculture and forestry, followed by the energy sector at 44 percent. In addition, 80 percent of banks said that the main physical risk to be incorporated into their risk assessment and management strategies is flooding, followed by drought, which was mentioned by 41 percent of respondents.
The study points out that the banking sector in Latin America and the Caribbean faces a great opportunity to advance its capacity to better assess climate change risks as part of its plans and strategies, thus improving resilience and preparedness to foster the transition to low-carbon economies.
According to the survey, 41 percent of banks surveyed said that they lack the mechanisms to identify, analyze and manage climate risks.
The authors of the analysis concluded that climate risks are not being properly addressed, mainly due to a lack of information on the financial impact of climate change and the absence of enforcement by regulators.
Even banks tend to regard climate change risks in terms of how companies impact the environment, as opposed to how companies are exposed to climate threats, which is key to addressing the expected increase in impacts related to a more extreme climate, the report states.
According to the Intergovernmental Panel on Climate Change (IPCC), the continued concentration of greenhouse gas emissions is expected to cause a spike in global temperatures—which are likely to exceed 1.5˚C over pre-industrial levels—causing rising sea levels and more frequent and intense climate events.
“Over the past decade, banks across Latin America and the Caribbean have made significant progress in incorporating sustainability criteria into their different areas of work. The study we are presenting today will also help to enable their timely management of climate risks in their financial portfolios,” CAF’s sustainable development vice president Julián Suárez Migliozzi said.
”Climate risk assessment is key to the goal of aligning the banking industry with a sustainable and equitable global economy in the 21st century,” UNEP director Eric Usher said, adding that such measures should better enable the region to bounce back from the COVID-19 pandemic.
The report calls for following the recommendations of the International Task Force on Climate-Related Financial Disclosures (TCFD) and replicating initiatives such as the UNEP FI pilot project with 16 of the world’s leading banks to develop an array of analytical tools and indicators to help strengthen climate risk assessment and disclosure. This information is included in the online course on “Climate Change and the TCFD: Risks and Opportunities for the Banking Sector” by UNEP FI with the collaboration of CAF
The survey found that more than half of the region’s banks use the Sustainability Report as a mechanism to disclose risks associated with climate change, while only 16 percent of the institutions issue reports through official financial forms as per TCFD recommendations.
Due to ignorance and little clarity around climate risk definitions, the authors also call on the region’s banking sector to outline common definitions on these issues known across the Latin American banking sector.
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