Businesses may soon find it hard to access finance for investments that are likely to destroy the environment should all banks commit to protect the environment.
Kenya Bankers Association (KBA) CEO Habil Olaka said banks are increasingly introducing social and environmental impact clauses in their loan conditions, following last year’s signing of sustainable financing guidelines.
The principles, which blend business ethics, governance, innovation and environmental risks, were passed last year as part of banks’ commitment to global Sustainable Development Goals (SDGs), which stress on climate change.
“Increasingly, there are banks which are having environmental conversations with their clients. It is no longer a preserve of environmental economists and scientists. Today, we see banks like NIC, Ecobank and KCB introduce environmental and social clauses into their contracts,” said Olaka.
Speaking at United Nations office in Nairobi on Friday during the third CEO roundtable on Sustainable Finance, Olaka added that in the wake of climate change concerns, the traditional conditions of extending credit can no longer be sufficient.
Banks have been operating on ‘4Cs checklist’ of character, capacity to repay, collateral and conditions attached to finance businesses. However, Olaka said that KBA members are now beginning to factor in the social and environmental impact of what they are funding.
Already, bank staffs are learning on these sustainable financing principles through an e-learning platform. Some 7,500 bankers have completed and received certificates and Olaka hopes that by end of 2017, all banks will be fully trained.
However, Olaka acknowledged that this shift will require collective and unrelenting collaboration between public and private sector to ensure non-environmental friendly projects do not easily access funding.
He said that it is critical that banks adopt a level playing field so that those seeking funding are subjected to the same social and environmental conditions touching on social and environmental risk. This, he said, will call for a shift from just profitability measures to other metrics when picking on who is the best player in the market.
“When you are focused on short-term deliverables, you only look at quarter to quarter growth, then of course. For long term, we need other measurement parameters such as social and environmental dimensions,” he said.
Nairobi Securities Exchange (NSE) Chief Executive Officer Geoffrey Odundo said companies at the bourse are shifting to sustainable reporting where they disclose what they have done to reduce climate change.
He disclosed that there are plans to introduce green bond which is a tax-exempt long term loan for development projects that are environmental friendly. This will help fund projects in areas such as solar, geothermal and wind.
“We are keen on bringing products that are for green financing. For example, Kenya has a huge space for geothermal. Also, there are a lot of discussions on carbon credits and green bonds,” said Odundo.
In March, NSE joined Sustainable Stock Exchange Initiative, a UN programme, to enhance governance standard for listed companies. It plans to introduce a Sustainability Index for listed companies to complement the traditional NSE 20 that looks at best 20 counters.
Emerging trends
This will bring it at par with countries like South Africa, Mauritius and Egypt who use this index to rank companies based on their initiatives in social and environmental protection especially through selective lending.
United Nations Environmental Programme Director Achim Steiner said that since most economic activities are determined by funding from financial institutions, the nature of projects they choose to fund will significantly determine if SDG agenda is achieved or not.
“I see the financial sector becoming critical players in making decisions. We need to agree on what is the best practice and what the emerging trends for future sustainable financing are,” he said.
