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Emerging markets, notably in Latin America, Asia, and Africa, rank among the most vulnerable to climate change, as they are exposed to both physical risks and transition risks associated with the shift to a low-carbon economy.

However, efforts to understand and respond to these risks are still in their early stages. To help address this issue, since 2018, 2° Investing Initiative has been expanding its work in emerging markets with an initial focus on Latin America. As part of this program, 2DII has worked on or has active projects in Brazil, Chile, Colombia, Malaysia, Mexico, Nigeria, Peru, the Philippines, and South Africa, among others. Our activities aim to help investors, banks, supervisory authorities, regulators, and governments integrate climate change considerations into their activities, with a special focus on portfolio analysis. Key workstreams of the program include:

Capacity building

This workstream spans training, workshops, and other capacity building activities together with our partners: UN Environment Program Finance Initiative (UNEP-FI), WWF Malaysia, WWF Singapore, Inter-American Development Bank (IDB), Principles for Responsible Investment (PRI), the Mexican Green Finance Committee (CCFV in Spanish), WayCarbon, and the Asia Sustainable Finance Initiative (ASFI). In 2021, 2DII won several new grants in this area:

  • Harnessing green finance through climate-related risk management and opportunities in Malaysia

As part of the £1.4 million UK PACT program by the UK government, 2DII is working with WWF-UK to promote green finance in Malaysia. This project will contribute to Malaysia’s carbon emissions reduction by supporting investments in low-carbon sectors, building capacity of financial regulators and institutions, and strengthening the integration of climate-related risks and opportunities into policies, decision-making processes and financial product innovations. Learn more here.

  • Mainstreaming climate risk assessment in credit operations of Brazilian development banks

2DII is collaborating with the consultancy WayCarbon on capacity building for two Brazilian development banks, helping them improve the way they integrate climate change into their internal decision-making and risk management processes. As part of this project, 2DII will apply PACTA to the institutions’ lending portfolios, help develop a climate risk assessment framework, and design a strategy to enable development banks improve their skills on this front. This project is funded by the UK PACT Green Recovery Challenge Fund.

  • Preparing the public and financial sectors for climate transition risk: capacity building and call to action

This project with Universidad de Los Andes and Willis Towers Watson seeks to build knowledge, capacity, and understanding of climate transition risks faced by the financial system in Colombia, as well as the methodologies to assess them. To this end, together with its partners, 2DII will create a theoretical course for decision makers (from both public and financial institutions) and universities associated with the project. To understand the current situation and progress in measuring climate-related risks in Colombia, 2DII will also apply PACTA and run a climate stress-testing exercise on the portfolios of insurance companies. This project is financed by UK PACT Colombia.

  • Strengthening capabilities on climate action for investors of the Peruvian financial ecosystem

2DII is working with Asociación para la Promoción de la Inversión Responsable y Sostenible and ImplementaSur to help raise awareness and build capacity in climate risk management among stakeholders and supervisors in the Peruvian financial sector. Notably, 2DII will implement PACTA and a stress-testing exercise for pension fund portfolios in Peru, the results of which will be delivered in individual reports and an aggregate market report. The analysis will form the basis of a series of reports and proposals for financial institutions to integrate best practices in climate risk management reporting. This project is funded by the UK PACT Green Recovery Challenge Fund.

Portfolio assessment partnerships

This workstream focuses on applying the PACTA climate scenario analysis and stress testing methodologies, in partnership with industry associations and supervisors in Latin America. As part of our newest project in this field, 2DII will work with the Chilean Financial Market Commissioner (CMF), helping them pilot test climate scenario analysis and stress testing tools for financial supervision. The project’s aim is to help the supervisor better understand the materiality of climate change risks for investments in the Chilean insurance sector. Operationally, 2DII will measure relevant insurance portfolios’ exposure to physical and/or transition risks, by implementing PACTA and climate stress exercises. The results of the analysis will be used to develop new supervisory tools. This project is funded by the IDB.

In addition to this project, 2DII is carrying out portfolio assessment partnerships with the following entities:

  • Colombian Insurers Federation (FASECOLDA)
    • Portfolio size: USD 14.941 billion
    • Number of investors: 34
  • Mexican Association of Financial Intermediaries (AMIB)
    • Portfolio size: USD 92.947 billion
    • Number of investors: 29
  • Colombian Financial Superintendence (SFC) – Analysis of pension funds
    • Portfolio size: USD 89.426 billion
    • Number of investors: 4
  • Colombian Trust Association (ASOFIDUCIARIAS)
    • Portfolio size: USD 7.279 billion
    • Number of investors: 11
  • Mexican Pension Funds Association (AMAFORE)
    • Portfolio size: USD 189.531 billion
    • Number of investors: 10
  • Brazilian Superintendence of Complementary Welfare (PREVIC)
    • Portfolio size: USD 180.050 billion
    • Number of investors: 299

Research

Finally, 2DII is devising new methodologies and research literature to address the specific needs of emerging markets stakeholders. Most recently, we published several new reports on the use of climate scenario analysis by financial institutions in Latin America. Together, the reports provide critical evidence to policymakers, supervisory authorities, investors, and banks on the need to quantify, manage, and disclose climate-related risks.

Transition Risk Assessment of Latin American Financial Institutions and the use of Scenario Analysis

  • This report focuses on the five largest financial markets in the region (Argentina, Brazil, Chile, Colombia, & Mexico). Using the PACTA climate scenario analysis methodology and proxy metrics, the report highlights the extent to which both banks and investors could be potentially exposed to transition risks.

Gauging the Exposure to Transition Risks of Colombian Insurers’ Investment Portfolios through the Use of Climate Scenario Analysis

  • Written in partnership with FASECOLDA, this report uses the PACTA methodology to analyze the Colombian insurance sector’s listed equity and corporate bond portfolios (total AuM: US$14.9 billion). In 2021, 2DII will continue its partnership with FASECOLDA, to monitor progress and to apply a stress-testing tool that will help model the losses associated with transition risks.

Risk or Opportunity? An Analysis of the Performance of the Collective Investment Funds of Colombia in the Face of Climate Risk

  • The third report analyzes the investment portfolio of the Collective Investment Funds (FIC) managed by 11 trust companies in Colombia, which represents 75% of the total AUM of the FICs managed by the fiduciary sector in the country (total AuM: US$ 9.3 billion). The study uses the PACTA metodology and was carried out in partnership with the Asociación de Fiduciarias de Colombia (Asofiduciarias).

Funding information: This program receives funding from the International Climate Initiative of the German Ministry of Environment. The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. Other components of this program are funded by the Inter-American Development Bank, UK PACT Malaysia, the UK PACT Green Recovery Challenge Fund, and UK PACT Colombia.

 

 

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