Banks face mandatory climate risk disclosures in CBK push
Banks will be required to make public their climate-related targets, such as annual green loans and percentage of loan books screened for sustainability, and the performance of these targets.
The Central Bank of Kenya (CBK) will require lenders to disclose climate finance risks and meet certain climate targets from January 2027, marking the latest regulatory push to align the sector with the global sustainability wave.
The regulator has published the draft climate risk disclosure framework in which it targets to make such disclosures voluntary for banks from January next year and then mandatory two years later.
The CBK is targetting several categories of disclosure, including banks' identifying and quantifying climate-related financial risks and how such risks could affect their performance. There will be a dedicated portal on the CBK website to facilitate reporting.
Banks will also disclose the impact of various climate scenarios in the short, medium, and long-term and the processes they have put in place to assess and manage such risks. They will also make public their climate-related targets, such as annual green loans and percentage of loan books screened for sustainability, and the performance of these targets.
“The enhanced climate risk disclosure framework signifies a commitment to promoting transparency, accountability, and sustainability in the financial sector,” said CBK in the draft.
“Banks can improve risk management, leading to more informed lending decisions and increased resilience. Transparent disclosures also attract investors seeking sustainable investments, while strategic planning that considers climate risks fosters long-term sustainability.”
Greenwashing
CBK adds that the framework will provide investors with information needed to assess the financial implications of climate change on potential investments and identify companies well-positioned for the transition to a low-carbon economy.
The framework has classified climate-related financial risks into physical and transitional risks. While physical risks include the resultant damage from the rising frequency and severity of events such as drought and floods, transitional risks include hazards such as a potential decline in the competitiveness of some borrowers in fossil energy as the world shifts to green energy.
“For example, some counterparties financed by banks operating in energy-intensive or high-carbon sectors may face reduced competitiveness during the transition to a low-carbon economy, particularly if they have not taken steps to adapt,” says CBK in the draft.
The draft includes templates that the CBK says will assist banks in disclosing climate-related information in a “relevant, useful, consistent, and comparable manner.”
The draft comes barely six months after CBK published draft rules dubbed Kenya Green Finance Taxonomy (KGFT) to guide banks in classifying whether particular economic activities are environmentally sustainable or ‘green’, joining the global push to stamp out greenwashing.
A green finance taxonomy is a classification system that highlights which investments are environmentally sustainable and, by extension, which are not. It defines a minimum set of assets, projects, activities and sectors that are eligible to be defined as "green" in line with international best practice and national priorities.
Kenya and other African countries have borne the brunt of the effects of climate change, even though Africa does not contribute significantly to the global volumes of greenhouse gases responsible for the adverse consequences of climate change.
