CBK ought to tackle climate change risks

Climate change is definitely one of the greatest challenges of our century and financial markets are not shielded from the ever increasing effects of climate change.

Traditionally, central bankers did not wade in the climate change debate with climate change effects always considered more an externality than a pertinent issue within the purview of financial regulation. There is however a new global reality as central banks and other market authorities take a keen interest in climate change and low-carbon transition. A monumental moment was the 2015 speech by Mark Carney, Governor of the Bank of England, where he warned of climate change as a key financial stability risk which if left to chance would lead to financial crisis with current financial risks due to climate change being in no proportion compared to what is to come. This he called “the tragedy of the horizon” because climate change impacts would be felt beyond the traditional horizons of most financial actors.

Risks owing to climate change are two-fold: exposure to extreme weather events such as droughts and storms (physical risk); and the risks associated with energy transition to a low-carbon economy (transition risk). Given climate trends, the magnitude of these risks is unprecedented and without decisive climate action, it is only a short time before banks find themselves with billions in stranded assets, as insurers and reinsurers hit a cliff edge in the face of historic climate-induced natural disasters. Insolvency owing to climate change will be inevitable for many financial actors globally. Granted, regulation can help avert or soften the impending risk. For context as a country, the landslides in West Pokot and current floods across the country, disastrous as they are, would be so tiny in the face of severe climate catastrophes in East Africa.