Nearly a quarter of African banks’ lending is directed to companies facing carbon transition risks, according to a Moody’s survey of rated financial institutions.
African banks’ exposure to companies facing carbon risks – mostly those in the mining, oil & gas, and manufacturing & transport sectors – is around $106bn, or about 22% of their loan books.
“African banks are more exposed to governance and environmental risks than their global peers. Relative governance weaknesses have led to operational and loan losses, while risk exposure to climate change and carbon transition is intense,” says the report.
While credit exposure to environmental risks is moderately negative for 72% of African financial institutions, it is highly negative for 13 banks in oil-dependent Nigeria and Angola. Nigerian banks have much higher exposures (51% of their loan books worth $27bn) than some of their peers as a result of high lending to the oil and gas sectors, which accounts for 23% of gross loans. Angola, which also has one of the continent’s most active hydrocarbon industries, is similarly exposed to carbon risk. This fuels a number of wider risks for banks, Moody’s says.
“African banks are exposed to environmental risks through their lending activities. Their corporate borrowers face the effects of carbon transition on their business operations as well as physical climate risks through extreme weather events, water shortages, floods and droughts,” says the report.
“These risks expose banks to financial losses through rising problem loans, disruptive regulatory changes and increased compliance costs relating to new climate standards and regulation. They also face reputational risk if stakeholders perceive them as failing to respond to climate change.”
Not all countries so exposed
Not all major countries on the continent are as heavily exposed. In Morocco, carbon-intensive loans amount to 19% of the total loan book, or $16bn. In South Africa, carbon-intensive lending also accounts for 19%, but that is equivalent to $51bn given the large size of its diversified economy.
“The leading South African banks are the continent’s largest banks. They have been the first to introduce sustainability and climate related objectives that include measurable targets that support, for example, the transformation of the energy sector. Most big South African banks have set clear targets to reducing thermal coal funding and new direct financing of oil exploration projects, while committing to scale up renewable finance.”
However, the report says that most African banks have more limited resources and expertise and will find it harder to adapt to the new requirements, much of which are being introduced under stakeholder pressure.
“Stakeholders are increasingly requiring banks to incorporate climate risk exposure criteria across their lending and investment decisions. In turn, this requires the financial services industry to integrate climate risk considerations into strategic decision-making, business processes and risk management frameworks, while there are also increased requirements for consistent and transparent reporting. Adapting to these new requirements will be challenging for banks with limited resources and expertise.”
Overall, African banks are gradually applying climate criteria across lending decisions, while also integrating climate risk considerations into their strategy, processes, governance and risk management frameworks, the report says. But it warns that there will be costs for those who are not alert to the changes.
“Lenders that are slow to adapt will face negative financial and reputational consequences that will gradually erode their credit strength.”