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Climate risk and finance: The banking industry’s sensitisation on climate-related risk management

June 16th, 2022

From the 23rd to 25th February 2022, the Kenya Bankers Association (KBA), with the support of the Financial Sector Deepening (FSD) Kenya, organised a training workshop aimed at building the capacity of the banking industry on the Guidance on Climate Risks Management by the industry’s regulator, the Central Bank of Kenya, and on the Taskforce on Climate-related Financial Disclosures (TCFD) which is included in the guidance.

The two-day workshop was attended by 90 participants drawn from KBA member banks.

The Guidance on Climate Risks Management aims at enabling banks to incorporate climate related risks into their governance structures, risk management frameworks and day-to-day operations.

The Guidance on Climate Risks Management, the various environmental, social and governance (ESG) initiatives by financial sector players like the Nairobi Security Exchange (NSE) and the Capital Markets Authority (CMA) and the KBA’s Sustainable Finance Initiatives (SFI) herald a growing and welcome interest of Kenya’s financial sector in sustainability.

For a long time, climate change discourse in particular – at both national and international levels – has tended to centre around public policy solutions and what governments, as policymakers, can do to address the problem. The language has often been that “developed countries’ governments are not doing enough”.

The role of the private sector, and that of the financial sector, in particular, has often been seen as a peripheral one if any. Further, climate finance has often been perceived as a form of compensation from developed countries to developing countries for the formers’ historical greenhouse gas (GHG) emissions and their impacts.

But this is changing, thanks largely to a near-universal consensus on the human influence over the global climate and a growing realisation of the financial sector of its impact on, and role in, sustainability.

The last United Nations Convention on Climate Change (UNFCCC)’s Conference of the Parties (COP), COP 26, has been, for instance, billed by many as the climate finance COP. It featured a number of climate finance events, the most notable of which being perhaps the launch of the Glasgow Financial Alliance for Net Zero (GFANZ) and that of the International Sustainability Standards Board (ISSB) to forge the harmonisation of standards within the climate-related financial disclosures space.

GFANZ is an alliance of over 450 firms spread across 45 countries and with over $130 trillion of private capital committed to transforming the global economy towards net zero.

Collectively, these local and global sustainable finance initiatives demonstrate that finance is responding to Article 2.1c of the Paris Agreement which calls for making all finance – both public and private – consistent with climate goals. This is a welcome development if we are to meet the Paris Agreement’s climate goals of limiting the global temperature rise to 1.5oC above pre-industrial levels and avoiding the worst impacts of climate change.

The financial sector has a pivotal role to play in meeting this ambitious target – by directing finance to projects and activities that lower or avoid GHG emissions, enhance adaptation and resilience, and support the attainment of the Sustainable Development Goals (SDGs).

Whilst the burden is still on developed countries to deliver on the equally necessary and important public finance, there is a need to unleash the trillions in dollars required in private investment globally to create a net-zero future and protect lives and livelihoods from the devastating effects of climate change.

Nationally, this need is estimated at USD 62 billion up to 2030, according to Kenya’s updated Nationally Determined Contribution (NDC) to the UNFCCC. The bulk (87%) of this money is expected to be drawn from sources other than domestic public finance, including international and domestic private resources, yet at present, domestic private finance constitutes only about 15% of what could be considered climate finance, according to a study by the National Treasury and the Climate Policy Initiative (CPI) that explored the landscape of climate finance in Kenya for the year 2018.

The need to work with the domestic financial sector to build its capacity in both financing green (mobilising private and public finance for green growth) and greening finance (integrating climate and environment factors as a financial and strategic imperative in the financial sector) can therefore not be gainsaid. This is what underpins FSD Kenya’s work in green finance. The core objective of this work is to enable access to green finance and ensure its integration into the financial sector.

It is for this reason that FSD Kenya partnered with KBA and the United National Environment Programme Finance Initiative (UNEP-FI) in delivering this important workshop. A key lesson from it is that given the right information, financial service providers cease considering climate-related guidelines as just statutory obligations that they must comply with, to seeing them as new business opportunities.

FSD Kenya is ready to continue working with KBA and other players in enhancing the acquisition of necessary information, knowledge, and capacities to enable the effective integration of climate change and the environment into the financial sector.  The limited capacity of the financial sector in this new and evolving area of work also calls for this kind of support.

For the Kenyan financial sector, effective integration of the environment and climate change is important for at least two reasons: sustainability is increasingly becoming the “new normal” and any business that fails to embrace it runs the risk of becoming uncompetitive. In addition, the sector operates in an economy that is both heavily natural resource-dependent and sensitive to the vagaries of climate change. Failing to integrate these issues into business operations is therefore tantamount to deliberately planning to hurt one’s own bottom line.

For more information on the workshop’s findings and lessons, please access its report here. 

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