REVERSING THE RIPPLE EFFECT
As the effects of climate change ravage the world, financial institutions are feeling the ripple effects working its way through societies around the globe. I&M Group PLC, a Tier-1 banking group spread across Eastern Africa, is no exception.
Interview with Zipporah Gitau
Group Risk & Compliance Officer of I&M Group
In Kenya—where the head office is located—approximately 43% of the country’s GDP is dependent on agriculture and tourism, which means that much of the sector is subject to the impacts of the climate crisis. Many companies in agriculture and manufacturing rely on hydropower and electricity to keep their businesses afloat, so water shortages are forcing businesses to look for (often carbon-intensive) alternatives such as fuel. In addition to increasing carbon emissions, this leads to a spike in working capital expenditure, which drives up the prices consumers must pay, eating into the bottom line of these impacted business and sectors.
"The effects of climate change are everywhere and it’s likely to intensify."
All of this, of course, does not go unnoticed by financial institutions like I&M Group. Zipporah Gitau is the Group Risk & Compliance Officer of I&M Group, overseeing the subsidiaries across Eastern Africa in Kenya (where she’s based), Tanzania, Rwanda, Uganda, and Mauritius (where the group has a joint venture with Bank One). In a nutshell, her role is to ensure that the enterprise risk management and compliance processes are embedded across all subsidiaries. With the impending climate crisis, factoring climate risk into I&M’s overall risk strategy has become even more critical.
As Zipporah says: “The effects of climate change are everywhere and it’s likely to intensify.” Physical risks are already having financial implications on all organizations: from stranded assets for carbon-intensive sectors such as transport and manufacturing, to resource scarcity and conflicts in tourism and wildlife sectors, to erratic weather patterns leading to reduced agricultural productions and earnings. The combination of the above leads to various risks such as liquidity risk, FX risk, capital erosion and credit risk for financial institutions, investors and shareholders.
All of this means that financial institutions like I&M Group have one critical agenda in the Board room: How can we mitigate these risks and contribute to the sustainable long-term prosperity of our clients and the local economy?
Although some financial institutions have only more recently started to embed climate risk into their strategy, Zipporah is emphatic that that’s not been the case at I&M Group or any of its subsidiaries. “Instead, we’ve been evolving our risk profile. For us, physical and transition risk are twins. Yes, we want to mitigate physical risk, but we also are working tirelessly to support our customers’ transition to a lower-carbon economy.”
For I&M Group, that means building a robust Environmental and Social Management System (ESMS) embedded into all aspects of lending decisions to deeply understand the impact of their investments across sectors, while simultaneously understanding which sectors are more resilient to the effects of the climate crisis. From understanding which segments need an injection of green lending, to determining if additional support should be provided to companies reducing the total amount of carbon emissions, to ensuring customers in their portfolio are aligning with, say, flower regulations—the ESMS has provided a wealth of invaluable data for I&M Group to act on—such as cutting back on lending in coal-related activities.
That said, completing a risk analysis and identifying the climate risk taxonomy is only part of the journey for I&M Group. The next step involves developing a strategy to support clients towards carbon emissions reduction and implementing the climate risk management framework.
“It’s not enough to just protect an institution’s reputation by saying we have a robust ESMS in place to determine if customers are complying with E&S issues,” Zipporah says. “What truly matters for us is seeing how the Group’s portfolio will transition with us towards net zero.”
Enter FMO. I&M Group and FMO already had a relationship since 2010, with FMO providing capacity development, portfolio guarantees, and loans to the Group over the years, primarily with the aim of enabling SMEs and underserved entrepreneurs to access inclusive and sustainable finance.
When I&M Group determined that there wasn’t enough internal capacity to fully embed climate risk management on the level they wanted, FMO provided technical assistance through a partnership with Climate Risk Services (CRS) to assist the Group with climate risk embedding.
For I&M Group, this aligned perfectly with the broader I&M iMara strategy of enabling sustainable business growth alongside the strategic integration of climate change for a low-carbon economy. “We are very, very excited to have the technical assistance to support our client transition, as we have a number of financial solutions such as our Green Energy Fund which we’re running in parallel as we embed our entire strategy and run capacity building across the Group,” Zipporah says.
Since the collaboration started, the Group has already seen several insights come to fruition, such as a physical risk portfolio assessment, which helped I&M diversify its strategy. “Now, we’re able to quantify our exposure by sector and location to support future investments and leverage data to develop climate change-specific investments,” she emphasizes.
The technical assistance will also help fine-tune I&M Group’s green taxonomy, which supports their overall lending strategy and value proposition towards their customers. CRS’ support on I&M Group’s opportunity framework has also assisted in further identifying green lending areas to better support customers, all in alignment with both corporate and national targets.
That said, Zipporah does make it clear that it has not always been smooth sailing. While country-level guidelines are aligned with the Kenyan SDG agenda and the Central Bank of Kenya, inter-bank alignment is lacking when it comes to executing the guidelines. “For example, financial institutions are told to report disclosures, but there's no standardized format provided, so all banks are reporting on what they think they should. While these are finer details to be ironed out, they are still important.”
In recognizing the multifaceted challenges of climate-related reporting, Zipporah mentions that I&M Group has become part of the Kenya Bankers Association’s (KBA) and Sustainable Finance Working Group (SFI), tasked with the development of a standard reporting template for FIs. Through this undertaking, I&M Group will significantly guide the accuracy and consistency of balanced sector reporting. Zipporah: "Localized common reporting will also springboard FIs to devise a more forward-looking and strategic approach in managing wider environmental challenges, while making measurable and accountable contributions to both national and international climate-related targets."
Providing greener investment alternatives, such as Green Bonds or climate advisory investment services can further aid the transition to a low-carbon economy.
If there’s one thing that Zipporah stresses, it’s this: truly embedding climate risk across the entire enterprise risk management and organization is no easy feat, but it is a worthwhile one. “It must start from the top, covering aspects like capacity building and training. If it’s embedded into the decision-making process, we can ensure that it becomes a part of our culture.” Internal awareness campaigns and integrating climate risk considerations into KPIs and performance evaluations are just some of the ways that I&M Group is taking a hands-on, iterative approach to discovering the most effective way to make climate risk everyone’s responsibility.
So, what could the future of finance for institutions like I&M Group across (East) Africa look like? In an ideal world for Zipporah, more financial institutions will start mitigating transition risk: for example, offering green lending products and services like nature-based solutions or renewable energy to climate-vulnerable sectors. "Providing greener investment alternatives, such as Green Bonds or climate advisory investment services can further aid the transition to a low-carbon economy," she adds.
“I think we’re going to see an increase in regulatory requirements soon on aspects like disclosure and reporting on climate risks. It will make partnerships with regulators and other key players more necessary.” In fact, more stringent regulations were recently issued across East Africa, starting with Kenya on climate regulations, then Uganda, and most recently Tanzania. For financial institutions aligned with COP27 climate-related disclosure standards, none of this will have come as a shock. However, those that wait may have less access to affordable concessional finance and capital, leading to a more costly transition period for these institutions and the customers in their portfolio.
For financial institutions that are committed to continually evolving, transitioning to net zero doesn’t have to involve growing pains. As for I&M Group, the plan is to keep their relationships with regulators, DFIs, and communities as strong as ever, staying ahead of the curve when it comes to climate risk disclosures to foster resilience. By doing so, Zipporah believes they can contribute to a wave of change across Kenya and the broader Eastern Africa region.
A positive ripple effect, so to speak.
Meet Zipporah Gitau at the Future of Finance Planet track: Climate risk in the board room | Tuesday 3 October 12:00
Deepen your understanding of the evolving regulatory landscape and learn effective strategies to understand and assess climate risks within your portfolio. Then, seize the potential opportunities presented by this approach.