We must ‘green’ our banking sector to survive climate change crisis

We have a problem.

The recently released State of the Climate in Africa 2020 report, indicates extreme weather events such as floods and droughts, increasing temperatures and accelerated rise in sea-levels. The associated impact was devastating.

The report also notes that by 2030, up to 118 million extremely poor people will be exposed to drought, floods and extreme heat in Africa if response measures are inadequate. Additionally, climate change could further lower gross domestic product (GDP) in sub-Saharan Africa by up to 3 per cent by 2050. And Africa is not alone.

Against this dire backdrop, the 26th UN Climate Change Conference of the Parties (COP26) is taking place in Scotland. Kenya and other countries have been scaling up their climate actions at the sectoral and national levels. In this context, the Central Bank of Kenya (CBK) issued Guidance on Climate-Related Risk Management to the banking sector on October 15, 2021. This is aimed at enabling banks to integrate climate-related risks into their governance, strategy, risk management and disclosure frameworks.

Climate change poses three broad risks to banks. First, the physical risk to the loan portfolio arising from damage or loss caused by climate and weather-related events such as floods and drought. Second, the transition risk arising from the changes towards a low carbon (green) economy. Third, liability risk that could arise from banks being sued for financing companies whose activities negatively impact the environment.

Nevertheless, efforts to mitigate and adapt to climate change also generate business opportunities for banks. These include the adoption of low emission energy sources, development of new products and services, access to new markets, housing and resilient infrastructure.

CBK’s vision is a banking sector that works for and with Kenyans as spelt out in the Kenya Banking Sector Charter in 2019. Banks should not just provide banking services but should meet needs of customers while also being aligned to environmental, social and governance considerations. In the context of the actions to reverse the climate crisis, we aspire for a world where all financial services are green. Three milestones have been reached in this journey.

First, in 2015, the Kenya Bankers Association launched the Sustainability Finance Initiative (SFI). The SFI aims at raising awareness on environmental, social and governance risks and financing within the banking sector. KBA has set up a comprehensive online training designed to enable banks to create long-term value for the economy, society and the environment. Currently, all 38 banks are participating and over 30,000 bankers have so far been enrolled.

Second, in January 2020, the first corporate green bond in East and Central Africa of Sh4.3 billion was issued by Acorn Group and listed at Nairobi Securities Exchange. The bond was also admitted on the International Securities Market segment at the London Stock Exchange (LSE). The proceeds were used to build environmentally-friendly housing for university students.

Third, in November 2020, KCB Bank was accredited by the UN Green Climate Fund (GCF) as the first financial intermediary for implementation of green financing in East Africa.

While acknowledging these milestones, a lot more needs to be done to green Kenya’s financial system, and issuance of the Guidance will quicken the journey. Over the next one-and-a-half years, CBK will walk with banks to build capacity and integrate climate-related risk management in their day-to-day operations.

In turn, this will attract global funds looking for opportunities to finance initiatives that build climate resilience, and thus positioning Kenya as a premier green finance hub.

For Kenya and other countries, the time is now to build a truly sustainable financial system that works for and with the people. Ultimately, all financing should be green. The stakes are high. There is no planet B.