Banks told to rev up green deals
Commercial banks have been challenged to put Environmental, Social and Climate risks (ESG) at the centre of their businesses else they risk regulatory headwinds and high cost of capital.
In a survey conducted by the audit firm KPMG last year, 40 per cent chief executive officers in East Africa say environmental and social governance reporting risks are reducing their profitability big time.
At the same time, 40 per cent of those interviewed said that ESG increases their financial performance, however, is emerged that banks are genrally struggling to sell the green story to their stakeholders.
“Banks are in a dilemma, institutions are struggling to articulate a compelling story to their stakeholders that will help them to benefit from ESG, some banks view it as an expense,” said Edward Isingoma of KPMG East Africa.
The heart of the matter however is that commercial banks will in future need to reject some loan applications on the basis of them not being climate and environmentally friendly.
Kenya Bankers Association chair Habil Olaka says it means that banks are affected when clients operations are affected by climate crisis.
Climate change
“When an organization after borrowing a loan is affected by climate change, its ability to generate cashflow to pay the loans is affected and hence banks are left with stranded assets,” said Olaka.
Olaka said that climate risk is something that banks need to be in control of. There are also reputational risks to banks if they don’t comply.
“Banks are frequent issuers of corporate bonds, currently we mainly have vanilla bonds, a number of investors are now going for social bonds, green bonds, they look at the attributes if the issuer, this can affect the performance of a bank,” says Olaka.
Banks may also face penalties over their inability to observe the law.
“With ESG frameworks in place banks are then able to attract sophisticated investors in their portfolio,” said Olaka.
Equity Group Holdings director Mary Wamae advises that banks don’t need to wait for regulators to start enforcing the ESG requirements and that they stand to benefit from the new reporting changes.
“We have been able to align the commercial engine of the business together with the social engine and integrate them and its a win-win,” said Ms Wamae.
ESG reporting
Last year, the Central Bank of Kenya and the Capital Markets Authority issued statements to the banking sector calling for the need for banks to embrace ESG reporting.
In 2019, the Lamu Coal Power project was canceled after US banks and investors pulled out following persistent lobbying by environmentalists. This means that investors and banks that had already sunk money in the project lost their capital.
AfDB abandoned the project, citing a focus on clean energy. GE, which was expected to acquire a stake at a later stage, backed out in September, saying it plans to exit the coal power industry.
South Africa’s Standard Bank also quit the Lamu project, noting that it was scaling down investments in coal.
And now, ICBC, which had appeared to be the only one standing with Amu Power, has abandoned the project too.
