Time ticking for banks over climate risk rules

Finance will no longer be finance without the word “sustainable”, and banks need to brace themselves in developing products and systems that embed sustainability

This week marks exactly four months since the establishment of climate-related risk management guidelines by the Central Bank of Kenya (CBK).

The banking regulator issued the guidelines as part of its strategy to help Kenya become more resilient to climate change and guide lenders to manage physical, transition and liability risks related to climate change.

The guidelines somehow also allude to the possible opportunities available to the financial sector as a result of managing climate change.

Based on the rules, boards of directors of banks are required to steer their banks towards a path that safeguards their current and future loan portfolio and banking operation in a climate-sensitive way.

The guidance has profound consequences on climate-related risks management, governance, strategy, competitive advantages and disclosure frameworks.

I believe the guidelines, if well executed, will not only be a game-changer for our economy but also generate tangible business opportunities for banks. Unfortunately, many banks are looking at the guideline as another box-ticking exercise to satisfy CBK requirements.

Across the globe, organisations are unlocking value based on the implementation of sustainability strategies within their businesses and it will be a disaster for our banks to lose this opportunity. The guideline is a pathway of embedding sustainability within banks’ business model.

The moment they embrace it from the opportunities and risks perspective, there will be definite value to be created as opposed to looking at it as just a requirement from the CBK.

Finance will no longer be finance without the word “sustainable”, and banks need to brace themselves in developing products and systems that embed sustainability. For some, this is a journey they have enjoyed for a couple of years and for some, this is still rocket science.

However, for the latecomers, there is no other option other than to get on the bandwagon, considering that they are now in the spotlight to support a more sustainable way of doing business and, in particular, climate-related risk management.

Kenya requires approximately $6 billion in investment annually for the next eight years to meet its commitments under the Paris agreement. This funding needs to come from the public and private sectors.

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The million-dollar question for boards of directors and management of banks is how well placed are their institutions to provide this huge amount. Progressive banks are already building skills, knowledge, tools, infrastructure, partnerships and collaboration to position for competitiveness and the efforts are bearing fruit.

Regarding the CBK guideline, management of the banks should be finalising their comprehensive plans on how they are going to meet the guideline’s requirements.

Specifically, the guide requires all banks to conduct staff sensitisation on climate change risk management before end of next month, which is only 45 days away.

In addition, banks are to submit a board-approved implementation plan by the end of June 2022 and quarterly reporting on implementation beginning 30 September 2022.

I have had the privilege to work with a couple of banks, helping them navigate the guideline from an opportunity and risks perspective. In addition, I have aided them to meet the requirements of the CBK.

My conclusion is that many institutions are downplaying the guideline and by doing so are leaving a lot of money (opportunities) on the table.

My advice to banks is that sustainable finance is the future. The guideline is just the tip of the iceberg and hence the need to internalise ways and means that banks can engage on sustainability issues irrespective of the size of the bank.

This may require walking with a sustainability expert, who hopefully will also build the capacity of banks’ employees, which is in limited supply within the financial sector. Banks must go beyond the plain vanilla compliance requirements and seek the emerging opportunities

Setting up green and sustainable initiatives in banks will require the right mindset and corporate culture. Banks’ senior management teams need to have a good understanding of the topic, particularly with more pressure mounting from the regulators and customers.

Generic approaches to adhere to the CBK guidelines should not be entertained. Instead, banks management/boards must apply themselves to their businesses to determine more concrete actions to form a climate-related opportunity and risk implementation plan.

With the CBK guidelines on climate change, the sustainability trend in banking will undoubtedly move from strength to strength, provided the banks invest in the right skills and knowledge.

I expect that in the next 12 months, more banks will be creating innovative green solutions that both reduce their carbon footprint and help their customers live more sustainably while creating value for their shareholders.

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