Radar | Nov 09,2024
A new set of guidelines to help commercial banks integrate environmental, social, and governance (ESG) considerations into their business planning, risk management, and lending practices was officially launched. The guidelines, developed in partnership with the International Finance Corporation (IFC) and the Ethiopian Bankers Association (EBA), are expected to elevate sustainability to the core of the banking sector's operations.
Endorsed by regulators at the central bank, the new framework provides procedures for banks to identify, assess, and mitigate environmental and social risks in their lending and investment activities. Executives note the goal is to steer financial institutions toward more sustainable, long-term practices that benefit both the economy and the environment.
Bethlehem Hailu, an ESG advisor at the IFC, emphasized that adopting these guidelines will help Ethiopian banks attract more investment while building trust with their clients. She noted that alongside the NBE's recent corporate governance directive, the ESG framework represents a significant step forward in improving the sector’s approach to managing sustainability risks and ensuring greater transparency.
"Banks will prioritise risks, with public disclosure becoming a critical part of their risk management processes," Bethlehem said at the launch event held at Skylight Hotel.
The IFC, under the World Bank, has been promoting sustainable finance globally, encouraging banks to factor in ESG considerations when making lending and investment decisions. Bethlehem further explained that these practices will not only safeguard the environment but will also support low-carbon activities, critical to mitigating the risks posed by environmental degradation, labour market mismatches, and carbon footprints.
“It’s crucial for attracting investment and enhancing financial stability," Bethlehem said.
Abie Sano, president of the Ethiopian Bankers Association, echoed the positive outlook, noting that the ESG guidelines offer banks an opportunity to enhance their accountability, create investor confidence, and contribute to the development of a more sustainable financial sector.
"It’ll guarantee a sustainable financial sector," Abie asserted.
In a bid to ensure banks comply with these new guidelines, the IFC is launching a five-month capacity-building program to train financial institutions on implementing the standards in their lending practices. This initiative will also include the development of action plans to fully integrate ESG considerations into the banking sector.
The National Bank of Ethiopia, which has also endorsed the new guidelines, views this move as essential for meeting international banking standards and reducing risks in the financial sector.
Frezer Ayalew, head of Banking Supervision at the NBE, noted that the guidelines are part of the bank’s ongoing efforts to strengthen financial stability. He said banks’ adherence to ESG principles would reduce systemic risks, empower depositors and contribute to the sustainability of the financial ecosystem. As Ethiopia continues to attract foreign investment, Freezer believes emphasis on customer trust and accountability will be key to strengthening the banking sector's global competitiveness.
"It aligns with our plan to ensure a transparent banking system," Frezer said.
The guidelines are especially timely, given Ethiopia’s current financial challenges. A recent Country Climate & Development Report from the World Bank estimated that Ethiopia will need 27.6 billion dollar over the next 25 years to address the impacts of climate change. Without substantial reform, the report warns of potential setbacks in agricultural productivity, infrastructure damage, and economic growth, further exacerbating poverty levels.
Industry leaders have welcomed the ESG guidelines, with some calling for flexibility in their implementation. Derbe Asfaw, president of the Cooperative Bank of Oromia, acknowledged the importance of the guidelines but urged the central bank to provide sufficient time for banks to adapt. He noted environmental risks, such as natural disasters and droughts, turn loans into non-performing ones.
"Experts are needed for proper compliance," Derbe told Fortune, noting that his bank has already begun to implement changes and form teams to align with the new directives. "We are gradually complying with the directives," he said.
The lack of experts remains a concern for many banks.
The central bank’s recent Financial Stability Report revealed a high level of credit concentration in the industry, with the top 10 borrowers holding nearly 23.5pc of the total loan portfolio. This concentration has led to increased concerns over systemic risks within the sector.
Musa Jeldo, an environmental consultant and General Manager of Franbon Consultancy Plc, pointed out that the lack of ESG guidelines in Ethiopia’s financial sector has contributed to numerous financial losses, citing the example of the Development Bank of Ethiopia, which has suffered massive loan defaults due to the absence of proper assessments. Musa noted that integrating principles into lending decisions would help mitigate such risks and nurture a more resilient banking sector.
"The absence of such guidelines has created critical issues in the banking sector," Musa said. "Investor awareness and capital allocation are essential for long-term."
As the Ethiopian banking sector moves forward with these new guidelines, the focus will be on a financial system capable of weathering the difficulties posed by both environmental and economic uncertainties.
PUBLISHED ON
Nov 17, 2024 [ VOL
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