Climate change continues to negatively impact various sectors of the economy. The financial sector is not an exception. With the rising impacts of climate change, so is the financial exposure in the sector. This led to the Central Bank of Kenya issuing the prudential guideline on Climate-Related Risk Management for the banking sector in 2021.
Kenya’s Economy is largely driven by the Agricultural sector which is rain-fed in nature and thus vulnerable to climatic changes in the region. The impact of Climate change on Agriculture in the region has been immense. Prolonged droughts in some areas and floods in other regions continue to affect production negatively which hurts the economy. Additionally, Tourism and Wildlife which is the leading foreign exchange earner continues to face its share of climate-related challenges. Severe droughts in the recent past had massive impacts on the wildlife. This not only has the potential to affect the foreign exchange earnings but also stifle growth in the hospitality industry which is a key employer in Kenya.
These sectors to mention a few, directly and indirectly, drive major financial investments and potentially affect the growth of the financial institutions in the country. It is therefore imperative for the financial sector to be at the frontline in championing and shaping climate solutions. Financial institutions can spur climate-smart agriculture through access to funds. Investments in new sustainable methods of farming such as irrigation and driving the adoption of efficient farm implements geared toward cutting cost and enhancing sustainable production can lead to climate adaptation and growth in the agricultural sector.
At the center of the Government Climate Action Plan is the Jaza Miti program which aims to plant 15B trees in the next 10 years. The resources needed to achieve this goal are massive and thus Financial Institutions have a role to play, in ensuring the country realizes this goal. Since the impacts of climate change are affecting all sectors of the economy, collaboration, partnerships and joint ventures between the Government and the Financial Institutions are needed to accelerate climate solutions.
Recognizing the importance of the financial sector in addressing climate change, CBK published the Climate Related Risk Management for the banking sector paving the way for the financial institutions to utilize instruments at hand to shape Climate Action and direct investments towards a sustainable future. Climate financing has been identified as the biggest impediment to addressing climate change in the Global South particularly in Kenya. Despite major financial institutions such as the African Development Bank being at the frontline in championing Climate financing, funding for sustainable projects remains low in the region.
In addition, financial institutions can contribute to a sustainable economy by utilizing financial instruments at hand to drive investments towards strategic sectors such as Energy and Transport. They are expected to play a key role in the transition to low-carbon transportation through direct and indirect investment. Enhanced credit flows to sustainable mobility will drive investment in the Electric Vehicle infrastructure. This has the potential to reduce Greenhouse Gas emissions while driving its uptake and accessibility in the country.