A survey among 78 financial institutions in Latin America and the Caribbean holding 54% of the total assets managed by the banking sector in the region, revealed that 38% of banks incorporate guidelines on climate change in their strategy and 24% have a policy on climate risk evaluation and disclosure.
The study entitled “How the Banks of Latin America and the Caribbean incorporate climate change in their risk management”, presented last week during an online event, was prepared by the UN Environment Programme Finance Initiative (UNEP FI) and CAF – Development Bank of Latin America, with the collaboration of the Latin American Federation of Banks (FELABAN).
About 69% of the participant banks identified forestry and agriculture as the sector most exposed to climate risks, followed by the energy generation sector at 44%. Even 80% of the institutions recognized that the main physical risk to be incorporated in their risk evaluation and management was ‘flooding,’ followed by ‘drought’ (mentioned by 41% of the banks).
Banks in the region have an opportunity to improve the assessment of climate risks in their plans and strategies, with the aim of increasing their resilience and be better prepared to support the transition to low carbon economies.
According to the report, 41% of the institutions that took part in the survey recognized they do not have mechanisms to identify, analyze and manage climate risks.
The authors concluded that climate risks remain unmanaged mainly due to a lack of knowledge regarding the financial impact of climate change, and because of the absence of regulatory demands.
Banks in the region still tend to perceive climate risks from the perspective of how companies impact the environment, and not how exposed these companies are to climate threats. Considering the latter is key for financial institutions in the face of the expected increase in disasters and other impacts of extreme weather, the report notes.
According to the Intergovernmental Panel on Climate Change, given current concentrations and on-going emissions of greenhouse gases, it is likely that by the end of this century the rise in global temperature will exceed 1.5°C above preindustrial levels. This will come with higher sea levels and more frequent and intense climate disasters.
“During the last decade, banks in Latin America and the Caribbean have made significant progress in integrating sustainability criteria in their different areas of work. The study that we present today will also contribute to the timely management of climate risks in their financing portfolios”, said Julián Suárez, Vice President of Sustainable Development at CAF.
“Climate risk assessment is key to the goal of aligning the banking industry with a sustainable and equitable global economy in the 21st century, which becomes even more relevant today as we need to build back better after the COVID-19 pandemic”, said Eric Usher, Head of UNEP FI.
The authors call to follow the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and to replicate initiatives like the UNEP FI pilot project with 16 of the world’s leading banks to develop analytical tools and indicators that strengthen the assessment and disclosure of climate risks.
The survey revealed that 53% of the banks utilized the Sustainability Report as a mechanism to disclose risks linked to climate change, while only 16% reported through regulatory financial forms as advocated by the TCFD recommendations.
Due to the lack of knowledge regarding climate-related risks definitions, the authors also recommend the banking sector of Latin America and the Caribbean to prepare a common taxonomy on these issues.