Authors:
Fernando Aguilar – Chair of the Finance Committee / Audit Director – BDO Panamá

Elibeth Mora – Advisory Manager at BDO Panamá

There is currently a large number of sustainability disclosure frameworks that financial institutions – as early implementers of sustainability reporting – have adopted on a voluntary basis; however, when investors need to carry out their analyses for decision-making, the available information tends to be inconsistent, fragmented and difficult to compare.

Financial institutions have seen increasing pressure from investors and other stakeholders to demonstrate their commitment to sustainability and to be able to show that progress in their sustainability reports. To achieve the above, and to meet investors’ expectation of having comparable, consistent and holistic information. In this regard, the adoption of the ISSB Standards represents a key step toward standardization, since they make it possible to integrate sustainability into the heart of financial reporting and risk management.

Implementing these standards requires a strong corporate governance component. An active role must be taken in overseeing the quality of sustainability information, establishing internal control processes, data management systems and clear reporting policies. Sustainability governance thus becomes a mechanism for ensuring that the information disclosed is credible, relevant and aligned with the expectations of the capital markets.

Progress is already visible in international markets. European banks such as HSBC and BNP Paribas have begun to integrate climate scenarios into their reports, aligned with the ISSB guidelines. In Latin America, institutions such as Itaú Unibanco in Brazil or Bancolombia in Colombia have announced the progressive adoption of international sustainability standards, driving transparency toward their investors.

Failing to move forward in this process entails significant risks:

• Reputational risk, from being perceived as lagging behind peers on sustainability.
• Capital access risk, since institutional investors and investment funds increasingly condition their decisions on environmental, social and governance (ESG) criteria.
• Financial risk, from failing to identify and disclose in a timely manner the exposure to physical and transition climate risks that directly affect loan portfolios, investments and insurance operations.

Now, institutions in general have faced two significant challenges when providing sustainability information to investors – according to their early adopters:

• Challenge 1: “report enough, not too much”. The shift in corporate culture from “report everything” to one in which what truly matters is reported is the greatest challenge for institutions that have previously reported under other standards. Reporting only what is material not only eases the time and quality of preparation, but also makes the report useful to investors for decision-making. Materiality analysis becomes a priority.
• Challenge 2: getting started. This is the greatest fear of institutions that believe it becomes complex and generates higher costs for the organization. In practice, these institutions focused on key aspects such as identifying risks and opportunities using the structure they already had, as well as understanding the financial effects these risks and opportunities generate. The above cannot be achieved without integrating the sustainability, accounting and investor relations areas.

Financial institutions may be exposed to climate risks when disbursing loans, or when purchasing investments in securities, of entities that have direct exposure to climate-related risks. To facilitate the implementation of strategies and their disclosure in sustainability reports, it is imperative to consider aspects of their value chain such as:

• Considering the disclosure of physical and transition climate-related risks in items such as loans and investments in securities
• Establishing policies on the characterization of climate-related risks within credit, market, liquidity and operational risk
• Considering risk classification frameworks for management purposes (for example, material risks and emerging risks) and for disclosure (for example, material risks only)
• Disclosing the percentage of assets that are related to sustainability or liabilities that are connected to sustainable financing

Aligning progressively with the ISSB Standards is a strategic opportunity to strengthen investor confidence, ensure the comparability of information and demonstrate resilience in the face of the challenges of climate change and sustainability. Adopting these standards in a planned and consistent manner will allow the financial sector to lead the transition toward more sustainable economies, mobilizing capital toward projects that generate long-term value and contribute to the stability of the financial system and of the environment in which it operates.