East African banks under pressure to report climate risks

East African banks are under pressure from financial regulators to integrate environmental, social and governance (ESG) issues in their operations.

At 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,” said Tracy Lane, associate director of climate, renewable energy and resilience at KPMG East Africa.

The stakeholders say integrating ESG across organisations 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 surrounding.

The latest regulation on ESG is the Guidance on Climate Related Risks issued by the Central Bank of Kenya in October 2021, mainly requiring commercial banks to “embed the consideration of the financial risks from climate change in their governance arrangements.”

The guideline also requires banks to include the financial risks from climate change in their risk mitigation strategy and to design a clear way of reporting on such perils.

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

In Kigali, the National Bank of Rwanda, through the 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.

The Dar es Salaam bourse in 2016 joined the United Nations Sustainable Stock Exchanges Initiative, an international lobby that champions performance on ESG issues among listed firms, signalling its commitment to promote ESG concerns.

The Bank of Uganda is said to be in discussions for possible regulations.

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

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

Joseph Kariuki, head of banking at KPMG, noted that more investors now include ESG considerations when making investment decisions, hence banks may have limited access to capital if they don’t integrate ESG issues into their operations.