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Climate-Related Financial Risks for Kenyan Banks

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Reuben Muhindi Wambui

6. Conclusion

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1This study has provided an analysis of two climate-relevant indices as a first set of quantitative climate-related financial disclosures that are comparable across Kenyan banks. Secondly, this study provides decision-useful information for the CBK and other financial regulators to formulate macroeconomic and financial policies that would seek to promote low-carbon transition via the banking industry as a key financial sub-sector. Further, this analysis provides a template for industrywide assessment of climate-related risk for banks in other emerging economies and the approach used for mapping national GHG emissions to bank lending sectors is also a key contribution to the literature on quantifying climate risks for the financial sector.

2This analysis could be replicated using standardised bank-level sectoral loan composition data in the possession of the CBK. As discussed, banks do not report gross loans across similar sector categories and this study initially standardised the sectoral reporting across the banks satisfactorily. However, replication of these results using data held by the CBK would validate these results and in essence provide a first set of comparable and decision-useful climate-related financial disclosures for Kenya’s banking industry. This could further be adapted and replicated across other countries where sectoral lending data and sectoral emissions data are available. The main limitation of this study is that both bank lending and GHG emissions are reported at the sectoral level. For example, there could be huge lending to a high-emissions sector (e.g. agriculture or transport) but with the loans funding business activities with fairly low contribution to emissions in the sector. To establish a more accurate linkage between sectoral lending portfolios and GHG emissions in this case, we would need both sets of data at a more fine-grained sub-sector level.

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