Extreme weather phenomena such as rising temperatures and the increasing frequency of droughts and floods are affecting lives and livelihoods in Africa. According to the Global Climate Risk Index 2021, five African countries ranked among the 10 countries most affected by extreme weather in 2019: Mozambique (first), Zimbabwe (second), Malawi (fifth), South Sudan (eighth), and Niger (ninth).

The negative societal effects of climate change, such as loss of life and livelihoods, are already and will continue to be tragic and severe, and are a key concern to governments and individuals. More frequent and severe weather events, as well as a delayed transition to a low-carbon economy and the increasingly material financial losses these directly and indirectly cause are also impacting the financial system, with potential systemic consequences for financial stability. The threat posed to the global financial system by climate-related risks is recognised by the Financial Stability Oversight Council’s 2021 report on climate-related financial risk and the Network for Greening the Financial System’s (NGFS) October 2021 progress report on global supervisory and central bank climate scenario exercises. Extreme weather events could lead to damage of physical assets, including real estate, productive capital, and infrastructure, consequent property and casualty insurance losses, damage to balance sheets of households and firms, increases in defaults, and potential financial sector distress. A late or sudden transition to a low-carbon economy could result in an abrupt repricing of climate-related risks and stranded assets, which could negatively impact the balance sheets of financial institutions (FIs).

Globally, the financial sector’s consideration of climate change risks has gathered momentum in the past 10 years. This has manifested, for example, in the development of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, the NGFS, and various initiatives under the United Nations Environment Programme Finance Initiative (UNEP FI), such as the Principles for Responsible Banking (PRB), Collective Commitment to Climate Action (CCCA), and the Net-Zero Alliances. While some countries and regions are actively driving their financial sectors’ approaches to climate risks through regulatory requirements, other jurisdictions are more influenced by private sector efforts.

This report seeks to assess the integration of climate-related risks in the prudential, financial, regulatory, and supervisory frameworks of a selection of African countries and identify potential levers to incentivise their internal-isation. It does not explore broader green/sustainable finance-related initiatives, like bonds and principles.

To assess the status of climate risk integration, 25 interviews were completed with 11 financial sector authorities covering 17 countries3 and 14 large private sector players (banks and insurers) from seven countries, covering 19 countries in total. (See list of interviewees in Methodology). The sample has been built to represent a diverse set of countries in terms of geographical areas and economic development.

Read the full report here.