GAB advises banks to avoid financing climate-related risk projects

Dr Ebenezer Ashley, Head of Research, Media Intelligence and Market Conduct, Ghana Association of Bankers (GAB) has called on banks to avoid financing projects with climate-related risk.

The Head of Research, Media Intelligence and Market Conduct, Ghana Association of Bankers, meanwhile, urged banks to support initiatives that promote best practices in renewables, climate adaption technology, and the transition to a circular economy, and avoid investing in businesses that could compromise the safety and security of environmental and social structures.

Dr Ebenezer Ashley explained that it will lend credence to the Bank of Ghana’s (BoG) call on financial institutions to stop or limit the financing of projects with significant adverse climate impacts.

Dr Ashley made the call in response to the role of banks in climate risk management. He stated that although banks have reacted positively to the BoG’s directive by developing short, medium, and long-term strategies to ensure the financing of businesses and projects with environmental sustainability components, there is the need for them to do more.

According to him, financing business projects that are environmentally unfriendly could increase the climate risk of banks and hurt their reputation. He noted that banks’ exposure to climate risk may be indirect through services offered by their clients and direct through bank activities.

Dr. Ashley explained that banks’ exposure to climate risk can be separated into two categories: physical and transition risk.

Physical risk, he said, refers to the harm that is anticipated to be caused by the material effects of climate-related disasters such as severe floods, hurricanes, and fires on banks, their clients, or both. Moreover, he defined transition risk as the impact of regulatory or legislative developments on bank operations.

“For instance, new climate regulation could affect demand for fossil fuels, and this could devalue coal reserves, thus, banks may be exposed to climate change and stranded assets risks when they hold collateral assets of fossil-fuel or assets of other carbon-intensive industries,” Dr. Ashley said.

Physical Risks

Dr. Ashley stated that recent estimates from Deloitte, an international professional services network, suggested that the costs of economic damage caused by physical risks during the 2020 fiscal year exceeded US$220 billion.

Dr. Ashley, however, cautioned that the long-term economic consequences of transition risks to banks could be quantified in trillions of dollars.

According to Dr. Ashley, best practices required banks to assess climate risks across multiple asset classes, sectors, and locations of given portfolios because vulnerabilities or risks and impact differed significantly between sectors.

Meanwhile, for financial institutions, physical risks can materialize directly, through their exposures to corporations, households, and countries that experience climate shocks, or indirectly, through the effects of climate change on the wider economy and feedback effects within the financial system.

Exposures manifest themselves through increased default risk of loan portfolios or lower values of assets. For example, rising sea levels and a higher incidence of extreme weather events can cause losses for homeowners and diminish property values, leading to greater risks in mortgage portfolios. Moreover, corporate financial credit portfolios are also at risk.

Transition risks materialize on the asset side of financial institutions, which could incur losses on exposure to firms with business models not built around the economics of low carbon emissions.