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

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Central Bank of Kenya Governor Patrick Njoroge in an interview on October 26, 2020 [David Gichuru, Standard]

We have a problem.

The recently released State of the Climate in Africa 2020 report indicates extreme weather events such as floods and droughts, rising temperatures and accelerating sea level rise. The associated impact has been devastating.

The report also notes that by 2030, up to 118 million extremely poor people will be at risk of drought, flooding and extreme heat in Africa if response measures are inadequate. In addition, climate change could further reduce gross domestic product (GDP) in sub-Saharan Africa by up to 3% by 2050. And Africa is not alone.

Against this disastrous backdrop, the 26th United Nations Conference of the Parties on Climate Change (COP26) is taking place in Scotland. Kenya and other countries have stepped up their climate actions at sectoral and national levels. In this context, the Central Bank of Kenya (CBK) issued guidance on managing climate-related risks in the banking sector on October 15, 2021. This aims to enable banks to integrate climate-related risks into their governance, their strategy, their risk management. and disclosure frameworks.

Climate change presents three main risks for banks. First, the physical risk to the loan portfolio resulting from damage or loss caused by climatic and meteorological events such as floods and drought. Second, the risk of transition arising from changes to a low carbon (green) economy. Third, the liability risk that could arise from lawsuits against banks for the financing of companies whose activities have a negative impact on 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, the development of new products and services, access to new markets, housing and resilient infrastructure.

The vision of CBK is a banking industry that works for and with Kenyans, as stated in the Kenya Banking Sector Charter 2019. Banks should not only provide banking services, but should also meet the needs of all customers. by being aligned with environmental, social and governance considerations. As part of the actions to reverse the climate crisis, we aspire to a world where all financial services are green. Three stages have been taken in this journey.

First, in 2015, the Kenya Bankers Association launched the Sustainability Finance Initiative (SFI). The SFI aims to raise awareness of environmental, social and governance risks and financing within the banking sector. KBA has implemented comprehensive online training designed to empower 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 been registered to date.

Second, in January 2020, the first corporate green bond in East and Central Africa of 4.3 billion shillings was issued by Acorn Group and listed on the Nairobi Stock Exchange. The bond was also admitted to the International Securities Market segment of the London Stock Exchange (LSE). The profits were used to build environmentally friendly housing for university students.

Third, in November 2020, KCB Bank was accredited by the United Nations Green Climate Fund (GCF) as the premier financial intermediary for the implementation of green finance in East Africa.

While recognizing these milestones, there is still a long way to go to green Kenya’s financial system, and the publication of the Guide will accelerate the journey. Over the next year and a half, CBK will support banks to build their capacity and integrate climate risk management into their day-to-day operations.

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

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

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