DURING a board sustainability training session held last year for a bank, one board member raised a thought-provoking concern: as financial professionals, their primary responsibility lies in lending and investing.
They questioned whether the additional requirement to oversee their portfolio’s Environmental, Social and Governance (ESG) performance extends beyond the bank’s core mandate.
This observation sparks an important discussion on how financial institutions can balance their traditional roles with the growing need to address broader societal and environmental challenges.
While banks are indeed in the business of lending and investing, integrating ESG considerations is not just a regulatory or ethical issue — it directly impacts financial performance and risk management.
For context, let us revisit an article I wrote for this newspaper in May 2024 titled More Than Just Banking, which highlighted the central role played by the financial sector in climate action.
The Paris Agreement underscores the pivotal role of financial institutions in driving the transition to a low-carbon, climate-resilient future. As facilitators of economic activity, these institutions are uniquely positioned to shape investment strategies that align with sustainable development goals.
This transformative agenda calls for financial systems to integrate climate risk considerations, promoting resilience and fostering long-term environmental and economic stability.
The Paris Agreement marks a turning point in global efforts to combat climate change, ushering in a new era of sustainable development.
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Among its three bold goals, the second objective emphasises aligning financial flows with pathways that promote low greenhouse gas emissions and climate-resilient development.
This goal underscores the necessity of transforming global financial systems to support sustainability. It provides a clear direction for all lenders and investors, given the link between financial risks, economic activity, greenhouse gas emissions and climate change impacts.
By prioritising investments in a low-carbon future, the Paris Agreement positions financial institutions as key drivers in achieving a more resilient and environmentally conscious global economy.
Their responsibility is twofold: first, by steering their portfolios toward Paris-compatible financing and investments, financial institutions can act as powerful levers for enhancing business sustainability.
By taking a climate risk lens at their portfolios and transactions, the financial sector can identify opportunities for steering capital towards climate investments.
Secondly, by reflecting and integrating climate-related risks into their risk management processes to improve their ESG profile. It is more than just banking, the financial sector needs to connect with its clients and supply chain on the net-zero transition.
Globally, as central banks begin to wake up to the climate crisis, they have devised multiple policy tools to tackle climate change first hand — for example, climate stress tests that specifically focus on climate risks to assess the resilience of financial institutions or the financial system as a whole.
In this article, I explore climate change and the role that central banks play in steering economies toward net-zero. I argue that climate change risk aligns entirely with central banks’ financial stability mandates.
Under this mandate, central banks are responsible for ensuring that the financial system remains capable of providing essential services even under adverse conditions.
The economic impacts of climate change cannot be overemphasised. According to a study by Swiss Re, cited by Bloomberg, the economic damages caused by natural disasters have surged dramatically, doubling over the past two decades in real terms.
In 2023 alone, these damages reached an astonishing US$280 billion globally. This escalating financial toll has prompted regulators and central banks to intensify their efforts in assessing financial sector exposure to climate-related risks.
Central banks are increasingly focused on two critical climate risks: transition risks and physical risks. Transition risks arise from the shift towards a net-zero economy, which brings significant structural changes.
These changes are driven by factors, such as carbon taxes, new regulations and advances in technology. To navigate this phase, banks must assess not only the risks but also the opportunities that come with the transition.
Central banks aim to ensure that the financial system is prepared to handle transition shocks and that financial institutions integrate these impacts into their portfolios and business decisions.
Physical risks, on the other hand, stem directly from the effects of climate change. Rising sea levels, river flooding, heatwaves and extreme weather events lead to productivity losses and economic disruptions.
These risks carry profound implications for businesses, the economy and consequently, the financial sector.
It is encouraging to see that climate risk management has been integrated into the supervisory mandates of central banks worldwide, including ours.
The Reserve Bank of Zimbabwe (RBZ) has reaffirmed its commitment to addressing potential risks posed by climate change to financial stability. In April 2023, the RBZ issued the Climate Risk Management Guideline 01-2023/BSD to address climate-related financial risks.
In accordance with the guideline, the central bank has required all banking institutions to provide their institutional climate risk profiles as of December 31, 2024, no later than March 31, 2025.
This directive reflects the central bank's commitment to integrating climate risk considerations into the financial sector. By requiring banking institutions to submit their climate risk profiles, the central bank aims to assess their exposure to climate-related risks and evaluate how these institutions are managing and mitigating potential impacts.
The directive underscores the RBZ’s proactive approach to managing the intersection of climate change and financial stability, emphasising accountability and transparency across institutions.
- Tapera is a certified expert in ESG impact investing. — [email protected].
