Sustainable Finance & Credit Risk in Africa

The United Nations Environment Programme Finance Initiative (UNEP FI) has published a new report assessing the extent and manner in which financial institutions in Africa’s largest financial hubs - South Africa and Nigeria - currently integrate sustainability in their core financing activities. “Banking on Value” contains a section on policy making designed to assist African financial institutions with policy refinements that integrate environmental, social and governance issues into credit risk assessments, as well as several recommendations to encourage the uptake of sustainable finance in Africa.

UNEP FI notes that an increasing number of financial institutions are embracing sustainability and in particular environmental, social and governance (ESG) issues in decision-making processes.

While international frameworks such as the Equator Principles have pioneered these concepts – especially in the context of project finance – these issues generally receive little consideration in the credit decisions made by banks when providing loans to small businesses and individuals. Furthermore, many banks are faced by a lack of practical guidance for implementation of ESG issues into credit risk processes.

To address these challenges in the African market, UNEP FI interview more than 25 financial institutions and supporting stakeholders to provide practical guidance for African institutions seeking to include these issues in their financing activities, through formal sustainability credit risk assessment (SCRA) policies.

While interviews are limited to South Africa and Nigeria, the study and its findings is aimed at assisting financial institutions throughout the continent, in embedding ESG issues in their management structures and lending practices.

“We believe that this practice can create the conditions that lead to sustainable growth in Africa, and new opportunities for financial institutions,” note the chairs of the UNEP FI African Task Force.

Finance in Africa is complex. The severity of poverty1 poses an enormous challenge for African countries and contributes to a cycle of dependence on finances provided by multilateral lending institutions.

Local financial institutions and banks have a pivotal role to play in the future of Africa’s development. Their ability, and importantly, the manner in which they provide capital, has the potential to encourage Africa’s development trajectory. Indeed, it is an awareness of this role, and the need for a sensitive approach to the acute environmental, social and governance issues on the continent, that is increasingly bringing leading financial institutions in Africa to embrace the concepts of sustainable banking and finance, says the report.

The report provides analysis as well as several recommendations for financial institutions and policy makers.

Source: United Nations Environment Programme .

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