Unboxing CBK Climate Risk Management Guidelines

More and more institutions are taking decisions and actions that take into account the resolution of the climate challenge. [iStockphoto]

The impacts and risks generated by climate hazards, exposure and vulnerability are more widely observed and projected in many ecosystems and human systems around the world.

This code red for humanity, however, remains measured, which means that every short-term action and measure that reduces emissions or adapts must be implemented drastically to preserve “a livable and sustainable future for all”.

Faced with this scale, it is imperative “to act urgently to combat climate change and its impacts”. This translates into companies taking actions that show they are operating and making decisions responsibly.

As an indication, as the global momentum for climate action continues, the financial sector should play a key role in driving this change. Some recognize the need to act and show leadership by tackling changing climate risks and financing shifting market demand and supply by directing capital and demonstrating emerging opportunities to markets.

For example, the Central Bank of Kenya issued guidelines on managing climate-related risks to the banking sector in October 2021 to guide banks in managing and integrating climate-related risks into their governance, strategy and governance frameworks. , risk management and disclosure.

In practice, more and more institutions are taking decisions and actions that take into account the resolution of the climate challenge. Some of the actions can be broadly categorized as follows:

Climate risk management. Climate change presents unprecedented financial risks, including physical risks related to acute weather events or longer-term climate trends such as sea level rise. They can arise from transition risks, changes in policies, technologies or consumer preferences aligned with the transition to resilient low-carbon economies globally, and achieving “net zero” emissions in the long term.

This has led to robust disclosure of climate risk exposure, guided by groups like the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, where lenders stress test against extreme climate impacts. on the value of their assets and the stability of the market. This allows them to be proactive in understanding and managing climate risks and evaluating their portfolio, pipeline and new investments.

Development of new sustainability-linked products: Financial institutions are rolling out “green” products and services, such as sustainability-linked loans, green bonds, carbon commodities, environmental indices that provide consumers with options transparent to reduce negative environmental and indirect impacts, and/or provide environmental benefits.

Low-carbon portfolios: Some financial institutions are introducing new indirect but potentially powerful mechanisms and techniques to reduce carbon emissions from loan portfolios and investment portfolios. In addition, and in line with statements on the coal phase-out, new strategies and approaches are being implemented by institutional investors to manage risks arising from exposure to fossil fuel businesses.

Low-carbon finance and investment and energy efficiency: There is growing recognition that the world must shift capital and investment from high-carbon to low-carbon activities if we are to avoid the consequences dangers of climate change. Thus, more financial institutions, such as banks, insurance companies, funds, fund managers, mutual funds, sovereign wealth funds, charities and endowments allocate capital and direct financial flows towards more investments and assets needed to transition to low-carbon and climate-resilient activities.

Financing and investment for adaptation to climate change: There is a growing need to support adaptation measures because it is too late to avoid some impacts of climate change, especially in developing countries, where physical risks are high and responsiveness is low.

This requires the involvement of the financial sector in linking development assistance and adaptation finance, such as assessing the vulnerability of communities to natural disasters, developing tools to manage adaptation risks , investment and insurance in climate-smart agriculture.

Corporate Engagement: Lenders have the potential to contribute to climate action by engaging with the companies in which they invest. Companies are an integral part of the business of financial institutions, both as customers of their services, as well as issuers of the debt and equity securities that are essential parts of the investment portfolio of a financial institution. a global investor. Thus, financial institutions can exercise property rights to influence and change corporate behavior in the face of climate change.