Beyond climate risk to climate adaptation

The role of financial institutions 

Climate change is already a reality. A quick reflection of the status of the weather events in Africa over the last 12 months saw various regions experience the effects of climate change ranging from extended droughts, changing temperatures, cyclones, flooding and changing precipitation patterns.

The residual impact is increasing pressure on human health and safety, food and water security and socio-economic development on an already resource constrained continent. The lingering effects are intensifying concerns regarding human health and safety, food and water security and socio-economic development on an already resource constrained continent.

Measuring economic costs of climate change remains a work in progress. We can assess the immediate costs of changing weather patterns and more frequent and intense natural disasters, but most of the potential costs lie beyond the horizon of the typical economic analysis. The economic impact of climate change will likely accelerate, though not steadily. Crucially for the coming generations, the extent of the damage will depend on policy choices that we make today.

Policymakers and investors increasingly recognize climate change’s important implications for the financial sector. In the East Market Area, we have seen guidelines issued by regulators of Banks in Kenya, Mauritius as well as to listed companies such as in Kenya and Tanzania impacting the climate change disclosures required for Banks as well as Insurance companies across the region.

In the East Market Area, we have seen regulators of Banks in Kenya and Mauritius issue guidelines and the same has been noted with listed companies in countries like Kenya and Tanzania. As a result, this has impacted the climate change disclosures required for Banks as well as listed insurance companies across the region.

Climate change affects the financial system through two main channels.

The first channel involves physical risks, arising from damage to property, infrastructure, and land. The second channel relating to transition risk results from changes in climate policy, technology, and consumer and market sentiment during the adjustment to a lower-carbon economy.

For Banks, physical risks can materialize directly, through their exposures to corporations, households, and countries that experience climate shocks, or indirectly, through the effects of climate change on the wider economy and feedback effects within the financial system.

Exposures manifest themselves through increased default risk of loan portfolios or lower values of assets. Physical risks are equally on the asset side for insurers and reinsurers, but to a great extent these risks arise from the liability side as insurance policies generate claims with a higher frequency and severity than originally expected.

This has therefore been the focus of many financial institutions, with businesses mainly focusing on their climate action on reducing their carbon footprint (mitigation).

Businesses are dependent on ecosystems, communities, infrastructure, and public utilities for the inputs needed to produce goods and deliver services. For example, building resilient infrastructure and utilities (roads, electricity, water) is traditionally seen as the responsibility of the government. In the face of climate disasters, governments may not have the capacity or agility to construct, maintain, repair or reconstruct these.

On the upside we have witnessed governments, multilateral organizations, the private sector entities and the civil society across Africa come together in events such as, Africa Climate Summit (ACS) and the Africa Climate Week 2023 (ACW) which was held in September of 2023 in Nairobi, to acknowledge the impact climate change on the continent and urgent need for swift and coordinated action to not only mitigate, but to adapt to the changing climate.

and demonstrate to markets the opportunities, risks, and potential returns of investments to support climate adaptation measures beyond managing the risks posed by climate change.

“Mainstreaming” climate change considerations throughout financial institutions’ operations, and in their investing and lending activities, will enable financial institutions to deliver better, more sustainable, short-term, and long-term results – both developmentally and financially. This will require making climate change – both in terms of opportunities and risk – a lens through which the institutions deploy capital. Some measures that financial institutions can take to adapt and be proactive in driving adaptation include:

The impacts of climate change are here today – and they will only worsen over time unless we all act now to integrate adaptation into overall corporate climate strategies alongside climate change mitigation measures. Businesses, including financial institutions, need to step up and play their part. This is not just in the interest of society and the planet – but in the knowledge that business needs a healthy planet and thriving society to be successful and sustainable – now and over time.