The growing significance of African regulators responding to risks related to nature in line with their mandate of maintaining financial stability has been highlighted in a new report from the African Natural Capital Alliance (ANCA), a forum for collaboration among African financial institutions, and management consulting firm Oliver Wyman.
The paper “Improving the transparency of nature-related risks in Africa: the emerging regulatory agenda” describes how stakeholders in the financial sector, including regulators, are becoming more aware that the destruction of nature poses threats to the stability of the economy and the financial system.
Africa economies depend on nature
The research makes it apparent that because sub-Saharan Africa’s economies are so heavily dependent on nature, the issue is especially serious for that region. For instance, nearly 70 percent of local residents depend on forests and woodlands for their daily needs, compared to the 50 percent of global GDP produced by the natural resources sector.
Additionally, the rate of loss of natural resources in Africa is higher than the global average. In contrast to the global BII score loss of 2.7 percent during the same time period, Africa’s Biodiversity Intactness Index (BII) score, which evaluates the number and abundance of species on land, decreased by 4.2 percent between 1970 and 2014.
According to a 2021 assessment commissioned by USAid, failing to protect natural capital as a whole (including its stocks of soil, air, water, and all living things, which support the region’s economy and human well-being) would cause an annual economic loss of more than $11.3 billion in East Africa alone.
Dorothy Maseke, the Nature Lead at FSD Africa and ANCA, says: “Enhanced transparency of nature-related risks is fundamental to managing them effectively. This is the case for individual financial institutions, which need visibility of the nature-related risks in their lending, underwriting, and investment portfolios. And it is also the case for regulators, so that they can identify nature-related risk concentrations for regulated entities and assess whether they are being managed effectively.”
African regulators embracing this complexity is so important, she adds, because the continent is disproportionately exposed to nature-related risks.
Role of the financial industry
In order to combat climate change, the financial industry must play a crucial role, according to Abraham Ongenge, Director of Finance at KCB Bank Kenya. We can help it by allocating the required funds to viable projects and companies as the largest source of investment money in the world. The report is an important tool for African financial institutions.
It emphasizes the significance of transparency and disclosure in addressing climate-related risks and offers clear and unambiguous recommendations on how to incorporate climate considerations into lending and investment choices.
As outlined in the paper, there are four straightforward actions authorities can implement as part of a roadmap for nature-related disclosure while the policy frameworks in their respective jurisdictions are still being finalized: Engage the ministries of finance and the environment to coordinate their regulatory approach with the government’s objective for nature policy. Identify internal capacity deficiencies and fill them. Analyze the regulated entities’ ability to act.
Participate in voluntary nature networks including the Task Force on Nature-Related Financial Disclosures (TNFD), the African Natural Capital Alliance (ANCA), the Network for Greening the Financial System (NGFS), and the Sustainable Insurance Forum (SIF).