Sustainability, climate risk reporting now mandatory for banks in Tanzania

The International Financial Reporting Standards S2 (IFRS S2) requires disclosure of information about climate-related risks and opportunities that could reasonably affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.

The regulations aim to enhance transparency and accountability in the financial sector while aligning with global standards.

The guidelines on reporting of sustainability-related risks and opportunities for banks and financial institutions and the guidelines on climate-related financial risks management and disclosures are part of Tanzania’s commitment to addressing economic, environmental, and social challenges, as well as adapting to the impacts of climate change.

Sustainability and climate risks

The guidelines underscore the interconnectedness of sustainability and financial performance in the banking industry and financial sector in general.

“The ability of a bank or financial institution to generate cash flows over the short, medium, and long term is linked to interactions with stakeholders, the economy, and the natural environment,” the draft sustainability guidelines state in part.

Similarly, the climate-focused guidelines highlight the threats posed by physical risks, such as extreme weather events, and transition risks linked to the global shift towards a low-carbon economy.

“Climate change poses significant risks to economic stability, affecting the safety and soundness of banks and financial institutions,” notes the climate framework.

Recognising the serious threat climate change poses to the economy, the government has initiated several measures to establish a robust legal and policy framework aimed at addressing climate change and the loss of biodiversity, as well as enhancing adaptation and mitigation capacities.

Consequently, Tanzania has developed the National Climate Change Response Strategy and National Adaptation Plan and has revised the National Environmental Policy. The initiatives align with the Nationally Determined Contribution (NDC) goals that contribute to global climate efforts to limit the rise in global surface temperatures, as stated in the Paris Agreement.

Both sets of guidelines place a strong emphasis on governance. Banks are required to establish governance structures to oversee sustainability and climate-related risks, with boards playing a central role.

“The board is responsible for overseeing sustainability-related and climate risks, setting targets, and monitoring progress,” states the BoT.

Senior management must implement strategies and ensure risks are integrated into daily operations, the central bank added.

Capacity building is also mandated, requiring staff to develop expertise in identifying and managing the risks.

Key reporting obligations

The frameworks introduce stringent reporting requirements on governance, strategy, risk management, and metrics.

Banks must disclose aspects such as sustainability-related risks and opportunities across short-, medium, and long-term horizons; climate-related exposures, including physical and transition risks; financed emissions, broken down into Scope 1 (direct), Scope 2 (indirect from purchased energy), and Scope 3 (indirect along the value chain) greenhouse gas emissions.

The financial institutions also need to disclose investments in green projects and contributions to financial inclusion initiatives, such as loans to small businesses and literacy programmes for underserved populations.

Scenario analysis and stress testing are mandatory to assess resilience under various environmental and economic scenarios.

The BoT will monitor compliance using its supervisory tools, warning that non-compliance could lead to corrective actions under the Banking and Financial Institutions Act, 2006.

Banks are required to align their disclosures with annual financial statements to ensure consistency and transparency.