5. Implications of the results
Texte intégral
1From the baseline and forward-looking analysis, we have seen three key results:
Emissions Exposure Index (EEi): Kenyan banks, with the exception of an outlier, have fairly similar exposure to climate risk through their loan portfolios, given the GHG emissions represented by their sectoral lending.
Emissions Funding Index (EFi): Kenyan banks, with the exception of an outlier, have differentiated funding of climate risk attributed to their loan portfolios that is fairly proportional to their market shares of gross loans, and this is expected given the similarity in exposure profiles. Larger (smaller) banks will have higher (lower) funding of climate-related risk.
Forward-looking analysis: Banks with a high concentration in lending to the manufacturing, energy, and water sector are expected to have an increase in their risk exposure given the expected large increase in emissions in the energy sector under both the 2030 BAU scenario and the 2030 transition scenario. Overall, larger (smaller) banks will still have higher (lower) funding of climate-related risk.
2The fairly similar climate risk profiles of the Kenyan banks means that banks face similar exposure to climate-induced risk factors given the GHG emissions represented by their sectoral loan composition. From the funding index, the key implication is that any climate financial policies proposed by the CBK or the government that aim to achieve low-carbon transition in the banking industry by reducing lending to high emission sectors should not target any specific banks but be formulated taking into consideration the proportionality of climate risk funding to the market shares of gross loans. This, in fact, would create an incentive for the CBK or government to propose market-led initiatives by banks to divert lending away from high-emissions sectors, because the banks can contribute to the transition cost in proportion to their market shares of gross loans without any particular banks being targeted or singled out.
3Another policy implication from the expected increase in emissions in the manufacturing, energy, and water sector is that the country’s energy transition will be central in shaping the country’s low-carbon transition and reducing the associated climate-related risk posed to the stability of the financial system. Thus the country’s energy policy, which seeks to further reduce fossil electricity generation to more sustainable renewable energy, sources should be expedited to cut back on emissions in 2030 and thus reduce climate-related risk.
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