How financial institutions are responding to climate change risks

Investors and financial institutions are facing the looming downside risks of climate change, prompting a shift towards sustainable growth and shared prosperity. Richard Munang, African Regional Climate Change Coordinator at the United Nations Environment Programme, highlights the urgent need for action. The impact of climate change is no longer abstract; it is a reality that will affect everyone, including financial institutions. Munang categorizes the challenges into four key areas. Firstly, he emphasizes that 52 out of 54 African countries have ratified the Paris Climate Change Agreement, focusing on energy and agriculture. This presents an opportunity for financial institutions to develop products that support these sectors and drive sustainable growth. Secondly, Africa's GDP is predicted to decline by 15% in the next nine years and by a staggering 85% in the next 29 years if climate action is not taken. This emphasizes the need for the financial sector to integrate climate solutions into their portfolios, especially in sectors like agriculture, energy, and infrastructure. Munang also stresses the importance of tapping into the informal sector, which constitutes over 80% of the continent and offers a $300 billion lending opportunity. Financial institutions play a vital role in developing products that cater to this sector, providing access to financing and driving climate action. Lastly, Munang highlights the significance of leveraging social finance to support entrepreneurial ideas and climate action initiatives, making access to finance easier and more affordable. Financial institutions must play a proactive role in combating climate change and aligning their portfolios with sustainable solutions. Munang warns of the long-term effects if climate change is not addressed, with Africa's GDP projected to shrink significantly in the coming years. He underscores the importance of climate-proofing financial portfolios and focusing on the informal sector, which generates 80% of the continent's jobs. Developing financial instruments that cater to youth-led climate solutions and local initiatives is crucial to mitigating the risks posed by climate change. Munang calls for a strategic approach by financial institutions, leveraging communal cooperatives and technology like blockchain to bridge the financing gap. Policy plays a central role in driving sustainable change, with Munang advocating for incentives, integration of climate action in education curricula, and data-driven decision-making. By incentivizing and empowering the informal sector through tax incentives and supporting climate action initiatives, the financial sector can catalyze sustainable development and climate resilience across Africa.