One theme that echoes across the conversations I recently have with organisations is uncertainty. Financial institutions express feeling overwhelmed by the rapidly evolving regulatory requirements they are under, leaving many unsure of how to proceed.
Having advised many organisations on this topic, and perhaps as a way to calm myself in such an unpredictable space, I consistently offered the same message of reassurance: if your organisation has a robust understanding of its climate risks, you will be far better positioned not only to comply with today’s requirements but also to adapt to future changes. The key is getting the fundamentals right.
What’s behind recent uncertainty?
What was once voluntary guidance is rapidly becoming embedded in financial and corporate reporting frameworks. Central banks and financial regulators across Latin America are actively exploring ways to strengthen their resilience against climate risks. They recognise these risks as potential threats to financial stability, capable of amplifying traditional exposures like credit, market, and liquidity risk.
Several countries in the region – including Bolivia, Brazil, Chile, Costa Rica, and Mexico – have adopted the IFRS Sustainability Disclosure Standards. These standards require organisations to report on sustainability-related risks and opportunities, starting with climate-related risks. This shift is not only raising awareness and setting clear expectations for financial institutions to build the necessary capabilities, it marks a move from qualitative, disclosure-based expectations to quantitative, risk-based management, with direct implications for financial reporting, solvency, and capital adequacy.
Particularly, Mexico is stepping up its regulatory game when it comes to climate risk. Authorities are actively updating existing frameworks to ensure that financial institutions embed climate-related risks into their Integrated Risk Management systems. A notable example is the recent revision to the Unified Insurance and Surety Regulations (CUSF), which requires insurance companies to factor in climate considerations when calculating capital reserves. considerations when calculating capital reserves.
At the same time, the Mexican Central Bank has amended Circular 4/2012, introducing new obligations for hedge funds. Institutions must now identify, assess, and manage climate and environmental risks, supported by clearly documented methodologies, policies, and procedures.
The smartest response is not to obsess over templates or disclosure formats but to focus on building a solid, decision-useful climate risk assessment.
Robust climate risk assessments should help uncover and manage a spectrum of climate-related risks and opportunities that could impact portfolios, lending, solvency, liquidity, and capital allocation. While regulatory requirements vary, the core objective of climate risk management remains the same: to protect asset quality and strengthen long-term financial resilience. When done effectively, a climate risk assessment is more than ticking a compliance box; it naturally aligns with regulatory expectations. The gained insights directly support the reporting requirements, because they are grounded in the same goal: understanding, managing, and mitigating material financial risks.
In this way, climate risk assessments become a critical tool that transcends compliance. It can be integrated into credit investment and portfolio decisions that ultimately preserve shareholder value and bolster market confidence in an economy undergoing rapid transition.
So, where does this leave financial professionals? In this dynamic landscape, the smartest organisations are those that focus on three core principles:
- Stay informed, but don’t get obsessed with the regulations: Understand the evolving regulatory landscape, from local requirements to international disclosure standards, but avoid getting lost in chasing compliance templates. The focus should be on substance over form, recognising that strong climate risk management naturally aligns with regulatory demands.
- Build climate risk assessments that drive decision-making: Regardless of the methodology or data constraints, your climate risk assessment should be practical and valuable. It needs to inform governance, shape strategy, guide portfolio management, and support day-to-day risk management, not sit in a silo. Getting the fundamentals right enables institutions to navigate uncertainty while maintaining operational resilience.
- Connect climate risks to core financial metrics: The most effective climate risk assessments translate climate insights into financial impacts, particularly on credit risk, liquidity, solvency, capital adequacy, and profitability. Financial institutions should focus on integrating climate considerations directly into existing risk frameworks, stress testing, and capital planning. This bridges the gap between sustainability narratives and concrete financial decision-making.
Regulations may change in the future, but your preparedness doesn’t have to. Whether financial regulatory authorities in Latin America introduce new requirements, a strong climate risk assessment remains your best safeguard. Get in touch to assess your resilience.
