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Banks can accelerate transition to low carbon green economy

Absa Bank branch on Queensway House. [Wilberforce Okwiri, Standard]

If not acted upon, the climate change war may cost Kenya up to Sh7 trillion in the next decade, according to the Ministry of Environment. In addition, the State of the Climate in Africa report highlights that climate change could further lower gross domestic product (GDP) in sub-Saharan Africa by up to three per cent by 2050.

Human-driven environmental pressures have raised the risks of environmental degradation. In recognition of the threats posed by climate change, banks are emerging as shining lights in efforts to stem the tide and lead the transition of businesses towards a low carbon green economy through green financing. Through their resource allocation capabilities, banks and other financial institutions are now an indispensable cog in the war against climate change.

But why green financing? This is defined as an eco-friendly funding rulebook that integrates innovative funding models with sustainable development across diverse sectors of an economy.

Businesses will always need financial resources and banks can leverage their position as financiers, to transform our country’s economic structure through capital formation, capital leveraging, and industrial integration. Acting as a bridge between the financial industry and environmental conservation, banks can guide businesses looking to tap from the vast pool of green financing, spurring them to adopt eco-friendly practices as an important starting point in business creation or development.

Green finance can form the basis for achieving high-quality economic development in Kenya. It motivates businesses, both large and small, to get keener on building green credentials and finding innovative ways to operate sustainably, reduce their carbon footprint as well as energy consumption. In the long-term, these measures improve their bottom line growth, reduce business risk and deliver the desired effect of slowing down the planet-warming rate.

By integrating green financing structures, banks can indirectly influence an accelerated adoption of green solutions in carbon-intensive industries such as manufacturing and transport, which account for 35 per cent of global greenhouse gas emissions. Through green financing mechanisms, players gradually reduce their investment in low-end industries that are guilty of environmental pollution and increase their investment in sunrise, new energy industries.

Through green financing policies, banks can divert the flow of funds to green industries, thus spurring a rapid improvement of the national green development level. 

For instance, Absa Bank recently signed a Sh1.25 billion Credit Guarantee Scheme with the Africa Guarantee Fund (AGF), with particular support to women entrepreneurs as well as mid-sized businesses qualifying as green transactions.

It is encouraging to see both the private and public sector players appreciating the gravity of the matter and taking action. The Kenya Bankers Association (KBA), for example, has initiated Sustainable Finance Initiative (SFI) programme, which trains bank employees on how to scale up green financing models and partnerships. 

Last year, the Central Bank of Kenya (CBK) released Climate-Related Risk Management guidelines to facilitate the integration of climate-related risks in governance, strategy, risk management and disclosure frameworks by local banks. The guidelines also spell out transition risks and how to mitigate them.

The guidelines provide a clear opportunity for banks to lead the national drive towards accelerated change and transformation to a low carbon (green) economy.

The government can support this agenda further by creating pro-sustainability policies such as tax reductions which encourage banks to invest more in supporting eco-friendly businesses.

Ms Waiyaki is the Head of Sustainability and Citizenship at Absa Bank Kenya PLC