Greening Kenya’s Banking Sector

Greening Kenya’s Banking Sector

We have a problem. The recently released State of the Climate in Africa 2020 report, indicates that in 2020, the climate indicators in Africa, were characterized by extreme weather events such as floods and droughts,increasing temperatures and accelerated rise in sea-levels. The associated impact was devastating. The report alsonotes 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 percent by 2050. And Africa is not alone.

It is against this dire backdrop in Africa and the worldthat the 26th UN Climate Change Conference of the Parties (COP26) is convening in Glasgow, Scotland. It brings together governments, businesses, civil society and citizens with the expectation of commitments to ambitious actions that are needed to counter climate change. Further delays in these commitments or if they are unambitious would spell doom to our destiny.

In the build up to COP 26, Kenya and other countrieshave been scaling up their climate actions at the sectoral and national levels. It is in this context that the Central Bank of Kenya (CBK) issued Guidance on Climate-Related Risk Management (Guidance) to the banking sector, on October 15, 2021. The Guidance 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. For instance, the abandonment of previously well–entrenched energy sources such as coalmay lead to banks being left with obsolete stranded assets that were used to secure loans. Third, liability riskthat 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.

Finance sits at the center of business, and CBK’s vision is a banking sector that works for and with Kenyans as spelt out in the Kenya Banking Sector Charter in 2019. Banksshould not just provide banking services, but should […]

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