How Banks can help African Companies Achieve Their Sustainability Goals

Recently, Kenya hosted the Africa Climate Summit which concluded with African leaders agreeing on the ‘Nairobi Declaration’, which serves as a basis for Africa’s common position in the global climate change process.

The Declaration proposes new financing mechanisms to alleviate Africa’s debt and unlock new climate funding to help advance green industrialization and boost sustainable agricultural practices. Research has shown that Africa contributes the least to global greenhouse emissions, but it is disproportionately affected by climate change. Solving this crisis will take a collective effort to work together towards the regional goals such as outlined in the Declaration. One avenue that the private sector can utilize to achieve this is green or sustainable financing.

Green finance – loans and investments that support environmentally positive activities – is a way for banks to address a growing range of external pressures. Customers are increasingly interested in financial services that are committed to ecological goals. Shareholders are looking to make investments that align with their long-term sustainability objectives. And regulators are putting pressure on banks to reduce their environmental impact.

Around the globe, business leaders identify productivity and profitability as their top priorities, but they pinpoint sustainability as one of their biggest challenges, alongside cybersecurity, according to recent research by the IBM Institute for Business Value (IBV). The 2023 report, ‘CEO decision-making in the age of AI’, also reveals that roughly 50% of CEOs and their executive teams now have compensation directly tied to sustainability goals, a significant jump from a year ago when the figure was just 15%.

Complicating the issue is sustainability’s expanding definition and a level of organisational uncertainty around what qualifies as appropriate metrics. There’s also doubt about the trustworthiness of sustainability reporting. Just 45% of CEOs stated they had confidence in their organizations’ ability to accurately report on ESG strategies and initiatives. To make matters worse, public trust has fallen in what is being reported.

Getting things wrong clearly risks damaging credibility, so tracking and measuring sustainability is a huge issue for businesses. Fortunately, senior executives in the financial services sector increasingly view sustainability as a source of opportunity. Bridging the gap between formulating aspirational ESG goals and turning them into a reality is getting a lot easier due to a growth in green finance.

Part of the reason for the stance of the financial services sector is the growing pressure from governments, investors, clients and the public as a whole, for it to align its activities with society’s goals. But there is also the enticement of the value of the sustainability pot. According to McKinsey, spending on physical assets on the road to net-zero could reach around $275 trillion by 2050 – $9.2 trillion per year on average – an annual increase of $3.5 trillion, equivalent to about half of global corporate profits, one-quarter of total tax revenues and 7% of household spending.¹

The global market for green finance is expected to reach $3.7 trillion by 2031.² This represents a significant opportunity for banks to generate new revenue and grow their businesses. However, the task of banks is not only to provide green financing, but also to help the whole economy move to a greener footing, which is resulting in banking CEOs coming under more pressure to be seen to be doing something substantive in the sustainability space. But where do you start from a lender’s perspective?

Embedding sustainability at the heart of operations

Banks need to fundamentally embed sustainability at the heart of their strategic priorities. This should include the mobilisation of capital, a commitment to reaching net zero by 2050, a close engagement with clients and wider society to help the whole economy transition and, finally, strong governance, which should be driven by a clear vision supported by the entire board of directors for best effect.

 To deliver these, the financial services sector needs better data from its clients to help them in their transition and manage risk. This is a reason why standards and reporting are so important. The impact of climate change also needs to be embedded into business frameworks. And there’s a challenge around training; banks need to ensure they have access to the skills needed to guide their sustainability objectives.

 There are a number of emerging technologies, such as quantum computing and artificial intelligence (AI), which are making a difference to what can be achieved through the monitoring and analysis of data to ensure sustainability targets are being met. The potential benefits are clear, but to extract the maximum value, it is important to invest in the right tools. IT infrastructure is only ever as good as its weakest link, so ensuring the most appropriate technology is used is essential.

 Don’t forget SMEs

 Everyone speaks about ESG but a lot of the time they’re really just focused on climate.

 This could be especially problematic for small to medium-sized enterprises (SMEs) – a key pillar for unlocking African’s economic potential – that often have a limited or low understanding of their carbon footprint or how to measure it. Given the broad complexities of carbon accounting, many smaller businesses could have issues getting to grips with the new skills and processes this can require.

 There’s still a huge responsibility for them to look at their own risk profiles regarding the broader ESG agenda, but they’ll need help transitioning to become a carbon neutral or more resilient and sustainable enterprise. Banks, therefore, have an important role to play, working hand-in-hand with their SME clients to help them negotiate these quite complex scenarios. This support could include the use of AI to help curate data, as well as the use of various reporting platforms to assist with disclosure submissions.

 On the one hand, there are all the tools and accelerators needed in terms of change management and engagement. But on the other hand, there’s still a real need to ensure the underlying accuracy of the reporting processes. It’s essential to not forget the basics.

 Operating the levers of change

 Sustainability will require a massive shift in approach to asset allocations – it is the biggest business opportunity for banks this decade. Identifying the levers that are going to create the behavioural changes within the financial services sector to make this happen is today’s task. Also, banks that have a commitment to sustainability, and create business-as-usual practices around it, are going to have long-term success. Those who are just starting out on their sustainability journey should turn their aspirations into actions, it’s not too late.

 From a banking perspective, it’s about what their customers, shareholders and regulators require; they’re all looking for banks to make a tangible difference as far as sustainability is concerned, as opposed to just paying lip service to it. This is a genuine revenue opportunity – one that offers the chance to change the world through responsible banking.

 The demand for green finance is rapidly growing, as more and more companies and investors look for ways to make a positive impact on the environment. Banks that can meet this requirement will be well-positioned to succeed in the years to come.

 In addition to the financial benefits, green finance can also help banks improve their brand reputation. By being seen as a leader in sustainable finance, banks can attract new customers and investors. It can also open the door to building relationships with governments and other organisations that are working to address climate change.