OPINION | CBK’s GREEN FINANCE TAXONOMY (KGFT 1st Edition)
INTRODUCTION
The debate around Green Finance Taxonomy is an interesting one because we all feel the impact of climate change and the ripple effect it has on the environment through climate-related risks.
This has made it important for economies to invest and draft policies to address climate change impacts such as floods,cyclones,typhoons,droughts,wildfires et cetera
All these risks have a huge potential to impact the global economy at large and needs measures and policies for mitigation and easy adaptation to weather the harshness of climate change as this affects the value and quality of assets used to access financing or generate wealth.
Global Outlook
European Union & European Investment Bank
The Global North countries have enacted policies to help mitigate against climate crisis. European Investment Bank (EIB) has been in the forefront as the world’s main financiers of climate action. The European Union and EIB have been playing a key role in the implementation of the Paris Agreement(COP21) whose activities places sustainability as a core element for this decade(2021-2030)
EIB 2023 total financing was €44.3billion ( #Climate action €22.6bn, #environmental sustainability with climate action €19.2bn, #Environmental sustainability €2.5bn)
International Sustainability Standards Board(ISSB)
The Trustees of the IFRS Foundation,at COP26,announced the formation of ISSB to help in developing standards that will result in an impactful and high-quality,comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. Other initiatives include Climate Disclosures Standards Board (CDSB), the Task Force for Climate-related Financial Disclosures (TCFD), World Economic Forum’s Stakeholders Capitalism Metrics etc. The IFRS Standards IFRS S1 & S2 are the resultant standards whose effective dates for annual reporting periods began on 1st January,2024 with earlier application permitted.
International Association of Insurance Supervisors(IAIS)
The body is working on structures such corporate governance,risk management,valuation of assets & liabilities, and investment activities by its regulators and supervisors in more than 200 jurisdictions it represents. Issues include;
1 Catastrophe insurance-reducing abrupt macroeconomic losses caused by extreme weather events
2 Banking stability affected-adverse impacts on growth,inflation,production & consumption,credit supply,collateral value,sovereign debt sustainability, and asset values.
3 More unforeseen claims-will increase underwriting and liquidity risks hence resulting in premium increase
Continental Outlook-Africa
South Africa,Kenya, and Rwanda have offered green investment handbooks aimed at closing huge climate financing gap. The Green Finance Taxonomy handbooks are dubbed “SA GFT” “KGFT” & “RGT” respectively.
Kenya Green Finance Taxonomy
Players:
1 Central Bank of Kenya
On 15th October,2021 The CBK through its “Guidance on Climate-Related Risk Management” issued a Guidance to the banking sector aimed at enabling banks to integrate climate-related risks into their corporate governance structures,strategic plans,risk management,and disclosure frameworks. This was aimed at addressing climate change related concerns and risks and it aims to address various climate-related financial risk drivers such as;
Physical risk-These are impacts of climate or weather related issues and long term(decades) progressive shifts of climate
Transition risk-These are financial risks which may occur during adjustment periods towards lower carbon emissions economy as a result of policy,technological or market changes
Liability risk-These are contingent liabilities which might be legal cases related to climate change such as loss and damages resulting from effects of climate change such as effects of floods,cyclones,Tsunamis etc
Capital Requirements to account for Climate Risks
The CBK is responsible for monetary policy & is planning to increase banks’ minimum capital requirements to cater for risks associated with climate change,cybersecurity among other factors. There is need for this based on stress test conducted by Kenya Bankers Association (KBA) last year which indicated that Kenyan banking sector is vulnerable to climate change(physical risk posing a major challenge)
This could also see banks discuss in detail the proposed Climate-Adjusted Capital Requirements(CACRs) by climate advocates. CACRs advocates propose that banks should fund their loans that are high risk as a result of climate change with increasing shareholders’ capital. This would mean that depositors’ monies are safe while shareholder’s equity are exposed to risks by dividing them into (a)risk weights and (b) leverage ratios.
The increase of minimum core capital debate will also see easy adoption of recommendations by Basel Committee on Banking Supervision (BCBS) which has advised banks to take “conservative approach” when assigning risk weights.
CBK’s MPC is set to meet on 5th June where they’re expected to give the economic outlook through the CEO’s survey conducted every two months.
2 African Development Bank (AfDB)
The African Development Bank is set to launch its AFRICAN ECONOMIC OUTLOOK 2024 template on 30th May, 2024 themed
“Measuring the Green Wealth of Nations: Natural Capital and Economic Productivity in Africa” preceded by Presidential Dialogue on 29th which is set to be attended by Heads of State.
AfDB has in the recent past committed to financing projects focusing on transport, water, energy and agriculture. The Development Bank also has initiatives such as Africa Climate Change Fund(ACCF) established in 2014, African Green Banks Initiative (AGBI)
Other Related Players:
Kenya Bankers Association
Insurance Regulatory Authority
Adopters: KCB & DTB
