Banks Face Mounting Pressure to Embrace Sustainability as Capital Market Opens

Banks Face Mounting Pressure to Embrace Sustainability as Capital Market Opens

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Banks are facing growing pressure to make sustainability central to their operations as regulators and international partners push for stronger disclosure and transparent reporting. Lenders are being asked to meet global standards in hopes of attracting investors, building trust with stakeholders, and improving their reputations at home and abroad.

That effort has picked up speed alongside the federal authorities' drive to develop a capital market. The Capital Market Development Project, backed by the International Finance Corporation (IFC) and the Ethiopian Capital Market Authority (ECMA), comes after the launch of the Ethiopian Securities Exchange (ESX) in mid-2024. Regulators believe new listings will benefit from stronger sustainability practices, which could make domestic companies more appealing to regional and international investors. For them, compliance is no longer about checking boxes and is tied to risk management and long-term growth.

Momentum gathered last week during a discussion at Addis Abeba University’s Business & Commerce Campus. The September 2, 2025, meeting focused on International Financial Reporting Standards (IFRS) S1 and S2, which cover climate-related sustainability disclosures. However, implementation has yet to begin and depends on a roadmap being drafted by the Accounting & Auditing Board of Ethiopia (AABE), in cooperation with FSD Ethiopia and its African counterpart.

According to Fikadu Agonafer, director general of the Board, the rollout will begin with state-owned enterprises, banks, insurers, and listed companies.

“Public interest companies will be the first to comply when the implementation starts,” he said.

For the banking industry, the pressure is particularly acute. Frezer Ayalew, director of banking supervision at the National Bank of Ethiopia (NBE), disclosed that lenders’ increasing exposure to foreign capital and competition compels them to adopt sustainability reporting as a basic requirement.

“When banks borrow from foreign companies, a sustainability report is one of the conditions,” he said.

Many banks have already begun adopting environmental, social, and governance (ESG) frameworks, along with Basel II standards. A corporate governance directive issued last year made it mandatory for banks to submit sustainability reports, which should include governance disclosures. The Central Bank is also encouraging lenders to finance climate-friendly projects.

“We need to raise awareness and then gradually move to full implementation,” Frezer said.

The direction is apparent. Global benchmarks such as the Basel guidelines on climate-related financial risk are shaping local expectations. Domestic banks should now weigh how climate change, biodiversity loss, water scarcity, and human rights concerns affect their loan portfolios, capital adequacy, and liquidity. Oversight of these non-financial reports, according to directives from the Central Bank, is mandated to be transparent and backed by strong internal controls.

Leaders of the Ethiopian Bankers’ Association (EBA) have tried to stay ahead. Last year, the Association issued sustainability guidelines to help banks establish reporting processes. Some banks are already training their staff and bringing in external trainers to build their compliance capacity.

“We've been linking banks with various trainers to support compliance,” said Demissew Kassa, the Association's secretary general.

The guidelines, developed with the support of IFC, are structured around five key pillars.

Governance comes first, requiring boards of directors to take sustainability oversight responsibilities. Strategy follows, pushing banks to design sustainability plans that fit their business models. Risk management, with an emphasis on systems to identify and manage environmental and social risks, as well as performance, is measured by specific indicators and incorporated into the pillars. Disclosure and transparency complete the pillar, with public reporting now seen as essential to earning trust from customers and investors.

Banks have been provided with practical tools to facilitate the transition, including a sample four-year action plan, standard ESG metrics, and a disclosure template. Sustainability, once a marginal mention in annual reports, is set to become a core part of annual financial reporting. Senior managers are expected to embed sustainability into lending decisions, operations, and supply chain management. At the very least, banks will be required to publish dedicated sustainability reports.

The Ethiopian Capital Market Authority is also laying the groundwork. According to Ambaye Merga, director of market development and capacity building, the regulator is working with the AABE, chaired by Eyob Tekalegn (PhD), state minister for Finance, on green financing, sustainability reporting, and green bonds.

“We're preparing new products with a focus on environmental sustainability,” he said.

Experts argue this shift is unavoidable. Dakito Alemu (PhD), a finance and accounting expert at Addis Abeba University, believes sustainability reporting is critical for Ethiopia’s integration into global finance. Foreign partners increasingly expect ESG data, and even banks with little direct environmental footprint should account for the practices of the businesses they finance.

“There is no company without environmental, governance, and sustainability concerns,” Dakito told Fortune. “To protect those around companies, they should demonstrate sustainability in every way.”

However, obstacles loom large. Participants in last week’s discussion flagged financial constraints and a shortage of expertise as barriers to adopting IFRS S1 and S2. A participant wondered whether knowledge comes first before implementation, echoing concerns about the industry's readiness.

Others debated how quickly Ethiopia should move. According to DerejaGelanew, an adviser at the AABE, each country can set its own implementation timeline. Several African countries have already adopted the standards, but opinions differ on how fast the domestic industry should proceed. Some called for making sustainability reporting a requirement for listing on the Securities Exchange.

It was a proposal rejected by Tilahun Esmael (PhD), CEO of the Exchange, who argued that Ethiopia lacks the investor base to justify mandatory sustainability requirements.

“In the absence of this demand, mandatory listing requirements will not achieve their objective,” Tilahun said. “For now, we will develop voluntary guidelines for listed companies.”

Despite the debates, ensuring long-term stability and "responsible growth" for the financial sector commanded consensus.

“This will help us optimise current profits without affecting the next generation’s survival,” said Dakito.

PUBLISHED ON [ VOL , NO ]