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Why eco-financing is the best bet for banks

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Why eco-financing is the best bet for banks


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

Summary

  • Kenya requires an investment of $ 6 billion each year for the next decade if it is to meet the commitments it has made in the Paris Agreement on climate change.
  • Climate finance and green loans need to be prioritized for commercial banks as they will offer financial institutions the opportunity to become more competitive.
  • Banks have environmental and social goals associated with their loans and investments.

Last week, the Green Climate Fund (GCF) approved a climate adaptation project to improve community resilience and water security in the Upper Athi River catchment area, Kenya, worth $ 10 million. The project is under the National Environmental Management Authority (Nema), which is a GCF-accredited entity in the Kenyan public sector.

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

KCB is the second accredited entity for GCF funds in Kenya, having received the go-ahead last November. Accreditation will be critical to catalyzing the bank’s green loan portfolio, which is projected to account for 25 percent of its loan portfolio by 2025.

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

Nema and KCB’s efforts alone will not close the financial gap. The private sector, financial and non-financial institutions need to realize that there is an opportunity to solve the threat of climate change while creating value for stakeholders.

Climate finance and green loans for commercial banks should be prioritized as they will offer financial institutions the opportunity to be more competitive and better manage their portfolio and operational risks.

Embracing climate change and having products and services that are sensitive to it will generate many benefits for the private sector, including brand development, cost reduction, risk management, revenue improvement and license acquisition. social to operate.

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

This is even more true for financial institutions, which should have the issue of climate change and the broader issue of sustainability at center stage.

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

Additionally, banks have environmental and social objectives associated with their loans and investments. If changing climate impacts are not taken into account, rates of non-compliance with environmental and social norms will definitely increase.

The biggest challenge facing the financial institution is the lack of awareness about the risk that climate change presents to its operations.

For example, despite the high potential exposure to the physical impacts of climate through water stress, the high risk of flooding, as well as changes in precipitation patterns in East Africa, many financial institutions currently do not consider physical impacts. climate change in their infrastructure lending decisions. doing.

The understanding and proper treatment of climate risks and opportunities continue to be limited by the lack of skills, internal capacity, standardization and tools of financial institutions.

For example, only a few financial institutions are developing strategies around climate change and, at the same time, are stress testing the consequences of climate change.

Another challenge facing financial institutions is the lack of tools, operational policies, data, and practical guidance on how to seize the opportunity presented by climate change while managing risks.

The above challenges are denying financial institutions the privilege of having a strategy aimed at unlocking the myriad of opportunities that exist for proclimatic strategies like GCF and green bonds, among others.

Going forward, I am envisaging an introduction of climate-related requirements or supervisory expectations by regulators such as CBK, CMA and RBA that will motivate, if not compel, financial institutions and other private sector companies to strengthen their governance. of climate risks and opportunities.

Kenyan financial institutions are missing a big moment by failing to align themselves with available climate change finance.

This is denying them the opportunity to expand their interest, income earnings, much-needed non-interest income emanating from managing climate funds, as well as reducing the risks to their loan / investment portfolio.

Therefore, it is paramount that more financial institutions embrace climate finance by hiring capacities, data and tools in the short and medium term as they move towards developing their internal capacities.

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