Africa’s financial sector must cope with climate risk for smooth transition to Net Zero: Report

Getting Africa’s financial sector ready to cope with climate risk is vital for a smooth transition to Net Zero emissions and resilience, according to a report on the state of climate risk regulation in Africa’s financial industry.

Net Zero refers to the balance between the amount of greenhouse gases (GHG) produced and the amount removed from the atmosphere.

The African Financial Alliance on Climate Change (AFAC) primarily intends to foster climate action by promoting knowledge sharing, climate risk-mitigating financial instruments, climate risk disclosure and climate finance flows.

The report was released November 10, 2021, at the 26th Conference of the Parties (CoP26) to the United Nations Framework Convention on Climate Change (UNFCCC) in Glasgow.

It was published by three global institutions: African Development Bank (AfDB), the Global Center on Adaptation (GCA), and the UN Environment Program Finance Initiative (UNEP-FI), which is a partnership between UNEP and the global financial sector and mobilises private sector finance for sustainable development.

Anthony Nyong, regional director, GCA, Africa, said:

At least 49 banks in Africa have over $200 billion in lending across sectors with high-potential climate risks.

This report highlighted the state of climate risk regulation in Africa’s financial sector and presented an analysis of the financial stability architecture and climate risk initiatives in 12 selected countries. These are Democratic Republic of the Congo (DRC), Mali, Egypt, Ghana, Mauritius, Morocco, Rwanda, South Africa, Tunisia, Zimbabwe, Kenya and Nigeria.

The report also proposed action areas to enable Africa’s financial industry to implement global best practices on environmental, social and governance integration, climate-risk disclosure and green finance.

The report assessed the state of climate risk integration in prudential, financial, regulatory, and supervisory frameworks of a selection of African countries.

To assess the status of climate risk integration, 25 interviews were completed with 11 financial sector authorities and 14 large private sector players (banks and insurers).

The study highlighted: 

• At least 9 out of 11 authorities interviewed (82 per cent) considered climate risk a high or very high priority on their agenda.
• Only a few financial sector regulators and supervisors have published regulations or supervisory expectations with respect to financial industry’s climate risk management practices.
• Among all potential options, non-binding measures are preferred by authorities but not widely implemented at present.
• Lack of data and capabilities to define regulations and guidelines were the main challenges indicated by 82 per cent of authorities interviewed

The report flagged that while most authorities have defined their approaches to climate risk, only a few have issued binding regulations so far. The Central Bank of Egypt, for instance, issued guiding principles of sustainable financing in 2021. These principles are not yet binding, but they have enabled banks to start building capacity.

The study stated that Kenya and Mauritius have published a specific prudential regulation to identify, measure and manage climate-related risks.

Egypt, Ghana, Morocco, Nigeria, South Africa and Zimbabwe have implemented regulations; DRC, Rwanda and Tunisia have not yet started integrating climate risks into their regulatory / supervisory actions.

The CoP26 panel agreed that the local financial industry must deliver solutions that fit African needs, learn from global best practices and increase collaboration among peers.

They also noted that African Nationally Determined Contributions under the Paris Agreement 2015 are often disconnected from financial sector development plans. For that reason, regulators must pay closer attention to ensure that the industry aligns with the global landscape for climate action in order to create policy environments that can attract climate finance at scale.

To support this mission, the Financial Sector Development Department of the AfDB has been developing the Africa financial sector corporate governance initiative to provide technical assistance to banks and regulators in building their capacity to identify, assess and manage climate risks.

The AfDB will deploy resources within the framework of its 10-year Climate Change and Green Growth Strategy (2021-2030) to position Africa’s financial industry at the forefront of the low-carbon and climate-resilient transition.

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