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Government and Policy

Banks In East Africa Are Under Pressure To Report Climate Risks

BY Lynnet Okumu · February 15, 2022 05:02 pm

KEY POINTS

Banks must include the financial risks from climate change in their risk mitigation strategy and to design a clear way of reporting on such perils.

KEY TAKEAWAYS

40 percent of the region’s company chiefs are still reluctant to implement ESG programs for fear they will reduce financial performance.

Financial regulators have mounted pressure on the East African banks to integrate environmental, social, and governance (ESG).

During a virtual seminar convened by audit firm KPMG, participants agreed ESG is swiftly shifting from a moral responsibility to a mandatory legal requirement.

“ESG is not just a reputational issue, but also a financial risk,” Associate director of climate, renewable energy, and resilience at KPMG East Africa, Tracy Lane said.

She further noted that integrating ESG across organizations means working towards positive environmental and social impacts in the community while actively reducing any negative impact a business may have on its social and physical surroundings.

In October 2021, the Central Bank of Kenya issued a regulatory Guidance on Climate-Related issues that mainly requires commercial banks to “embed the consideration of the financial risks from climate change in their governance arrangements.”

The guidelines further stipulate that the banks must include the financial risks from climate change in their risk mitigation strategy and to design a clear way of reporting on such perils.

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In Kenya, Nairobi Securities Exchange followed suit in November 2021 and released the ESG Disclosures Guidance Manual that guides listed firms on how to collect, analyze and report ESG information.

Meanwhile, the National Bank of Rwanda, through Regulation No 28/2019 of 2019, requires banks to prepare an overall report that explains the link between their financial performance and their social, environmental, and economic impact.

Tanzania signaled its commitment to promote ESG concerns in 2016 when it joined the United Nations Sustainable Stock Exchanges Initiative, an international lobby that champions performance on ESG issues among listed firms.

As for Uganda, it is speculated that the Ugandan Bank is still in discussions for possible future regulations.

KPMG’s 2021 East Africa CEO survey revealed that 40 percent of the region’s company chiefs are still reluctant to implement ESG programs for fear they will reduce financial performance.

“Failure to implement ESG programs bears more financial risks to banks than implementing them. For example, organizations negatively impacted by climate change will be unable to meet their financial obligations,” CEO of Kenya Bankers Association, said during the webinar, Dr. Habil Olaka said.

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