Lenders asked to factor climate change risk in credit reviews

In Kenya, CBK issued guidance on Climate-Related Risk Management to the banking sector in Mid October last year.

In Summary
  • Climate failure accounts for 42.1 per cent of long-term global risk
  • This risk could cause 64 per cent GDP hit to the world’s vulnerable countries. 

Climate action failure has been listed as the top global risk, with lenders asked to factor it in their credit assessment.

Climate failure accounts for 42.1 per cent of long-term global risk followed by extreme weather at 32.4 per cent and biodiversity loss at 27 per cent. 

Others are natural resource crisis 23 per cent, human environmental damage 21.7 per cent, social cohesion erosion 19.1 per cent, involuntary migration 15 per cent and adverse tech advances at 14.9 per cent. 

According to the Global Risk Report, 2022 by the World Economic Forum (WEF), climate change risk has the potential to crush the global economy, with financial institutions bearing the largest burden. 

''It is on this basis the UN Climate Change Conference (COP26 ) – held in early November adopted the Glasgow Climate Pact which enlarges the role of public and private sector financing in limiting the impact of climate change,'' the report reads in part. 

As a result, the principle of sustainability in operations has been adopted by numerous corporates, with some reporting climate-related risks and actions under a framework developed by the Task Force on Climate-Related Financial Disclosures (TFCD).

Established by the Financial Stability Board, the TFCD makes proposals for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions.

This enables stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.

In Kenya, the Central Bank of Kenya (CBK) issued Guidance on Climate-Related Risk Management to the banking sector in Mid October last year.

It aims at enabling banks to integrate climate-related risks into their governance, strategy, risk management and disclosure frameworks.

In an opinion piece published in Business Daily last year, CBK governor Patrick Njoroge says climate change poses three broad risks to banks.

They include physical risk to the loan portfolio arising from damage or loss caused by climate and weather-related events such as floods and drought.

It also poses a transition risk arising from the changes towards a low carbon (green) economy. Climate change also carries liability risk that could arise from banks being sued for financing companies whose activities negatively impact the environment.

According to the global risk report, climate change is already manifesting rapidly in the form of droughts, fires, floods, resource scarcity and species loss, among other impacts.

Agriculture and real estate have been cited as economic sectors likely to feel the pinch of the climate sector, with lenders advised to be more prudent in assessing credit risks. 

This is likely to see banks hike interest rates and increase loss provisions as Kenya moves towards risk-based loan pricing. 

According to WEF, the danger is particularly acute in Africa, with eight of the top 10 worst affected countries coming from that continent.

All 10 face GDP damage of over -70 per cent by 2100 under the current climate policy trajectory and a -40 per cent  hit even if the world keeps to 1.5ºC.

A commissioned by Christian Aid late last year shows climate change could cause 64per cent GDP hit to the world’s vulnerable countries. 

Dubbed 'Lost and Damaged',  the report shows by 2050 and 2100 the economies of these countries are still expected to be higher than they are today.

A previous study by Diffenbaugh and Burke, using the same methodology showed that GDP per capita is already -13.6 per cent lower across Africa than it would have been without global heating between 1991-2010. 

The country facing the worst projected GDP hit is Sudan, which in September was left reeling from heavy rains and flash floods affecting more than 300,000 people.