I. Climate transition plays a pivotal role for financial institutions in Latin America and the Caribbean (LAC)
Faced with the rapid increase in global temperatures, currently exceeding a 1.0°C rise above pre-industrial levels [1], the urgent need for climate transition is undeniable. This transition encompasses a suite of strategies and actions essential to curb global warming. In this context, financial institutions play a critical role in driving capital flows towards projects that support the objectives outlined in the Paris Agreement, aiming to keep the temperature increase below 2.0°C by 2050, and ideally under 1.5°C.
For financial institutions to achieve net-zero emissions targets, it is essential to integrate greenhouse gas (GHG) mitigation into their operations. A strong corporate governance structure is needed to support both local and international climate-focused initiatives within each organization.
This blog delves into how effective governance within financial institutions in LAC can significantly influence climate transition. We discuss how good governance not only enables the implementation of sustainable policies and practices, but also ensures that investment strategies align with critical environmental goals, promoting responsible management that contributes to the region’s sustainable development.
II. Governing a transition to net-zero
Poor management of climate-related risks can lead to significant consequences for financial institutions, therefore, climate risk management has turned into a central strategic issue within their operations. The financial sector has developed and adopted various international initiatives that strengthen their commitment to a successful climate transition. Notable initiatives include the Glasgow Financial Alliance for Net-Zero (GFANZ) and its banking sector-specific alliance the Net-Zero Banking Alliance (NZBA), the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP), the Partnership for Carbon Accounting Financials (PCAF), and the Science-Based Targets Initiative for Financial Institutions (SBTi-FI) (see Figure 1). These initiatives provide tools, guidance and standards for financial institutions to measure and disclose their climate impact, set specific targets, and develop effective strategies to fight climate change. Financial institutions in LAC have played a significant role in implementing these initiatives, putting together specialized teams and networks that ensure the relevance and effectiveness of climate strategies for the region, such as the Regional Implementation Team for PCAF LATAM [2].
Figure 1. FI-focused Transition-related Initiatives
A common element to all these initiatives is the need to integrate climate transition at every organizational level, starting by the highest ranks [3]. Senior management must commit to mobilizing resources across the entire organizational structure to ensure coherent implementation of climate transition strategies [4]. A comprehensive organizational approach ensures that climate transition is seen as an integral part of corporate strategy , not just the concern of a specific department.
In the context of climate transition, good governance involves integrating climate considerations into strategic and operational decisions to drive significant changes towards more sustainable operations and a reduction in the organization’s carbon footprint. This aims to [5]:
- Create organizational structures that support climate plans,
- Incorporate climate change mitigation into the organizational culture,
- Make climate a priority, and
- Support decision-making with climate change policies.
Initiatives such as GFANZ and TCFD highlight good governance as a cornerstone for the successful implementation of a net-zero transition plan. This emphasizes the need to clearly define roles and responsibilities within the board of directors and senior management, ensuring they hold ownership and accountability for carbon neutrality objectives. Properly assigning teams and individuals to all aspects of the transition plan is crucial, as is developing the necessary skills and organizational culture to support this change [6]. Adequate training and compensation incentives aligns employees’ interests with organizational goals, and promotes open communication helping to embed net zero-emission targets into daily organizational practices, ensuring an effective transition [7].
The implementation of effective governance in climate transition offers multiple benefits for financial institutions, including [8]:
- Improved risk management: Strong governance helps to identify, assess, and effectively manage climate-related risks, which is crucial for the long-term sustainability of the institution.
- Identification of opportunities: Effective governance enables the identification of strategic opportunities within the shift towards carbon neutrality, allowing institutions to innovate and capture new markets in a low-carbon economy.
- Increased investor confidence: Transparent and responsible governance practices attract climate-aware and sustainability-focused investors, potentially improving access to capital and financing conditions.
- Regulatory compliance and competitive advantages: A robust governance framework prepares institutions to comply with future environmental regulations, and provides a competitive edge in an increasingly regulated and environmentally conscious market.
III. FIs in LAC: Committed to Enable Advancement Towards a Net-Zero Carbon Economy
Various local and international financial institutions operating in LAC have made climate transition a key part of their strategic agenda, as evidenced by their commitment to various global sector initiatives. BBVA and Bancolombia are two banks that are benchmarks in the region, having developed a corporate governance model with a strong commitment to achieving their transition goals.
- BBVA: As an international bank, BBVA’s approach to governance includes a clear definition of roles and responsibilities at the board and senior management levels and includes people from different business areas such as Corporate and Investment Banking (CIB) from Mexico and South America in the global sustainability area. Governance plays a crucial role in the implementation of climate transition and climate change strategies. The board closely monitors progress towards climate-related objectives defined for the region, integrating sustainability across all executive and operational levels of the organization [9]. Additionally, BBVA commits to maintaining rigorous transparency by reporting on its progress and integrating sustainability criteria into its financing activities. Global Sectorial Heads in CIB are responsible for managing business strategies within sectors that have 2030 decarbonization targets, executing sector alignment plans, and supporting clients in their transition to a low-carbon economy. This demonstrates a governance model that not only complies with external regulations and expectations but also empowers the institution to lead in the transition to a low-carbon economy [10].
- Bancolombia: As part of its climate change policy, Bancolombia has established a climate governance model that starts with the Steering Committee of the Presidency. This committee also serves as the Sustainability Committee, and oversees the governance of all ESG issues, including climate change. The committee is supported by Bancolombia’s Board of Directors, specifically through the Committees for Good Governance and Corporate Risks, which serves as its main advisory body [11]. This good governance allows Bancolombia to guide its ambitious climate transition strategy with well-defined goals, such as the investment of 11 billion USD by 2030 to finance the transition, and phase-out from highly polluting sectors like coal. Bancolombia has made significant progress in adopting both regional and international commitments and standards, demonstrating its efforts to achieve climate transition [12].
Both banks have implemented their transition strategies by developing products and services for their clients that enable a rapid decrease in GHG emissions, significantly contributing to the goals of keeping the global temperature rise below 1.5°C, mitigating physical and transition risks, and capitalizing on the opportunities presented by this new economic model.
IV. Conclusions
Integrating robust, sustainability-oriented governance practices is essential for an effective transition towards sustainable development and decarbonization. Good governance not only facilitates the adoption and implementation of global initiatives such as GFANZ, NZBA, TCFD, and PCAF, but it also strengthens risk management, enables the identification and capitalization of new business opportunities within the emerging low-carbon economy, boosts investor confidence, and prepares institutions to meet emerging environmental regulations.
In this context, it is relevant for financial institutions in the region to promote the integration of these governance practices into their corporate strategies. By embracing these changes, they will not only actively participate in mitigating climate change but will also align with a global trend that prioritizes sustainability. This path leads to innovation and leadership in the financial sector, where the opportunities abound in new low-carbon markets, development of innovative products and services, and enhanced resilience of investment portfolios, all contributing to a positive and transformative impact on both business and the environment.
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Pedro Paniagua is an Associate at HPL and holds a B.Sc. in Electric and Electronic Engineering from UNAM, an M.Sc. in Finance and an MBA from ITAM. Pedro joined HPL in March, 2022. Since then, he has supported more than 12 consulting projects related to thematic bond structuring for sovereigns and financial institutions and developing sustainable finance strategies for banks. Prior to joining HPL, Pedro brings four years of experience in technology projects for Banco de México and one year in risk management in the private debt sector, where he analyzed the financial behavior of a senior debt portfolio with over 50 SMEs in Latin America.
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References
[1] IPCC (2018). Summary for Policymakers. In: Global Warming of 1.5°C. Available here.
[2] PCAF (2020). Regional implementation team: PCAF LATAM. Available here.
[3] Climate Safe Lending Network and Green America Center for Sustainability Solutions (2021). The Good Transition Plan. Available here.
[4] UNEP-FI NZBA (2024). Guidelines for Climate Target Setting for Banks (Version 2). Available here.
[5] Climate Safe Lending Network and Green America Center for Sustainability Solutions (2021). The Good Transition Plan. Available here.
[6] GFANZ (2022). Financial Institution Net-zero Transition Plans. Available here.
[7] TCFD (2021). Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures. Available here.
[8] TCFD (2022). TCFD WORKSHOP Session 2 – Governance. Available here.
[9] BBVA (2020). BBVA Report on TCFD October 2020. Available here.
[10] BBVA (2023). BBVA Report on TCFD 2023. Available here.
[11] Bancolombia (2020). Política de cambio climático del grupo Bancolombia. Available here.
[12] Bancolombia (2021). Climate-related disclosure report 2021 Report. Available here.