Why eco-funding is banks’ best bet

Green financing offers financiers a good chance to make an impact in the world. PHOTO | FILE | NMG

Last week the Green Climate Fund (GCF) approved a climate adaptation project on enhancing community resilience and water security in the upper Athi River Catchment Area, Kenya, worth $10 million. The project is under National Environmental Management Authority (Nema) which is a GCF accredited entity in the public sector in Kenya.

The upper Athi project is the second in Kenya that GCF is funding after $35 million on ecosystem-based adaptation in arid and semi-arid rangelands which is supported by the International Union for Conservation of Nature (IUCN)

KCB is the second accredited entity for the GCF funds in Kenya, having received the nod last November. The accreditation will be instrumental in catalysing the bank’s green lending portfolio, which is targeted to be 25 percent of its loan book by 2025.

Kenya requires an investment of $6 billion each year for the next decade if it is going to meet the commitments that it has made on the Paris Agreement on climate change which calls for emissions cut by 32 percent by the year 2030.

Nema and KCB efforts alone will not close the financing gap. There is need for the private sector, financial and non-financial institutions to realise that there is an opportunity to solve the climate change menace but at the same time, create value for stakeholders.

Embracing climate change and having products and services that are sensitive to it will lead to many benefits for the private sector including brand building, reduced costs, risk management, revenue enhancements as well as acquiring the social license to operate.

Unfortunately, not many private sector C-suites are having discussions on climate change and how it affects their operations as well as their shared value.

This is even more so for financial institutions which should have the topic of climate change and the broader topic of sustainability taking the centre stage.

Financial institutions are more susceptible to climate change. Changes in climate and their impacts on socioeconomic conditions will alter some of the parameters and methods that financiers have used to develop financial projections and evaluate credit risks for their loans and investments. This will have a direct impact on their bottom lines.

In addition, banks have environmental and social goals associated with their lending and investments. If changing climate impacts are not taken into account, rates of non-compliance with environmental and social standards will definitely be on the increase.

The biggest challenge facing the financial institution is the lack of awareness on the risk presented by climate change to their operations.

For example, despite the potential high exposure to physical climate impacts through water stress, elevated flood risk, as well as changes in precipitation patterns in East Africa, many financial institutions do not currently consider the physical impacts of climate change in their infrastructure loans decision-making.

Understanding and appropriately addressing climate risks and opportunities remain limited by lack of skills, internal capacity, standardisation and tools to the financial institutions.

For instance, only a handful of the financial institutions are developing strategies around climate change and at the same time, undertaking stress testing to climate change consequences.

Another challenge that is facing financial institutions is the lack of tools, operational policies, data and practical guidance on how to go about unlocking the opportunity presented by climate change and at the same time managing the risks.

The above challenges are denying financial institutions the privilege of having a strategy aimed at unlocking the vast number of opportunities that exist for the pro-climate strategies such as GCF and green bonds among others.

Going forward, I am foreseeing an introduction of climate-related requirements or supervisory expectations by regulators such as CBK, CMA and RBA that will be motivating if not forcing financial institutions and other private sector companies to strengthen their climate risk and opportunity management.

Kenyan financial institutions are missing big time for not being able to align themselves to the available financing for climate change.

This is denying them the opportunity to expand their interest, income gain, the much-needed non-interest income emanating from the management of the climate funds as well as curtailing the risks of their lending/investment portfolio.

It is, therefore, paramount that more financial institutions embrace climate financing by hiring capacities, data and tools in the short and medium terms as they move towards building their internal capacities.

Climate finance and green lending for commercial banks need to be prioritized as it will offer FIs an opportunity to become more competitive as well as better in managing their portfolio and operational risks.

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