Tuesday, December 3, 2024

How sustainability in banks will address climate change woes

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Climate change, diminishing resources, partners pressure and population growth continue to emerge as business challenges as well as opportunities.

Investors, employees and other stakeholders are increasingly demanding to understand and control both positive and negative impacts on environmental and social aspects of companies activities.

At the same time, policy and regulatory environments are evolving quickly to incorporate sustainability related requirements and constraints that affect public and private players – including banks.

For example, institutions such as the Bank of England, the Financial Stability Board and the European Systemic Risk Board are examining how lenders, insurers and pension funds would cope with the above challenges.

Locally, there has been talks from Central Bank of Kenya as well as Capital Markets Authority on policies designed to reduce carbon emissions as well as having more sustainable firms.

In short, the market is expected to change dynamically which may result to profitable business today becoming bad tomorrow (e.g. carbon stranded assets may face further problems as emissions are further limited by regulations), while things that seem unbankable today such as alternative energy infrastructure may constitute major business opportunities of tomorrow.

This is the case for more players in banking, which is presented with opportunities as well as challenges when it comes to climate change and other sustainability elements.

The onus is on corporate and investment banking teams to deploy the skills and creativity necessary to stay on top of changing realities and maintain a competitive advantage within the sustainability space.

Transition risk and climate policy goals lead to two parallel objectives for financial institutions, with potentially overlapping management strategies.

Risk and/or opportunity management is seen as a business objective, while contributing to climate policy goals—for example, by supporting the transition to the lowcarbon economy—is seen as a broader societal objective.

The latter management strategy is defined as climate progress.

The banking sector plays different roles in financing economic activity, with varying effects on contributing to climate problems and solutions.

Banks, therefore, need to pay close attention to climate change agenda for two basic reasons; The most fundamental one is to comprehend and manage their contribution to low-carbon economy and secondly, to further manage climate change related risks in their portfolios.

As banks endeavour to map out the opportunities as well as the risks, it is critical that they have a robust reporting mechanism.

The reporting should include all material parts of the bank’s business, notably including all parts of financing climate-relevant activities.

It will be important for banks to report on both climate problems, unacceptable investments such as thermal plants, and good investments such as renewables.

Current reporting practices often focus much more, sometimes exclusively on the good activities with little disclosure of high-carbon financing; A balance of the two will be key.

Attached to the reporting is the need to communicate on banks’ effort on sustainability and green lending.

Banks communications teams play a vital role in the sustainability strategy by communicating the bank’s sustainability story.

Part of this reporting mechanism that has also been positioned as the reporting paradigm of the near future is the Global Reporting Initiative (GRI), a standardised mode of sustainability reporting.

It is imperative for banks to have their teams equipped and certified with GRI standards to empower them in embedding sustainability into their strategies.

Banks communications team can help the bank to set the right tone to move beyond hard numbers creatively and effectively to showing sustainability in context with business values and goals to make banks stand out from competitors.

Different audiences have differing interests, perceptions and expectations of what is communicated to them.

Thus there is merit in targeting specific audiences with a defined message that is appropriate to them as opposed to a mainstreamed communication.

The story that is told could mean the difference between profit or loss as consumers and investors expectations are becoming more sophisticated, with a growing number actively basing their placement and financial choices on sustainability considerations.

This article was first published on Business Daily

Dr. Edward Mungai
Dr. Edward Mungaihttp://www.edwardmungai.com/
The writer, Dr. Edward Mungai, is a global sustainability expert. He is the Lead Consultant and Partner at Impact Africa Consulting Ltd (IACL), a leading sustainability and strategy advisory in Africa. He is also the Chief Editor at Africa Sustainability Matters. He can be contacted via mailto:edward@edwardmungai.com

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