The Kenya Bankers Association (KBA) in collaboration with Financial Sector Deepening (FSD) Kenya, the International Union for Conservation of Nature (IUCN) and the Mitsubishi Corporation Fund for Europe and Africa (MCFEA) have unveiled a study that quantified and analysed environmental risk exposure to banks. The study primarily focused on identifying regulatory, policy and institutional gaps that have adversely exposed financiers to defaults and impaired asset values.
In the findings, the disparity in environmental regulation, particularly riparian land zoning rules were highlighted as a contributing factor to environmental risk exposure to banks and investors. According to the study, the relationship between zoning guidelines under the Physical Planning laws and the Environment Regulations riparian rules are not well defined. The study revealed that land surveys and cadastral maps often do not demarcate expected riparian boundaries. This has given way to real estate development being designed and constructed on riparian zones on the strengths of unmarked survey maps.
Additionally, the study highlights that the same applies to wildlife migratory routes. This has led to the demolition of properties financed by banks. Delays due to litigation by affected members of the public, according to the study have also contributed to great losses to both the banking client and financiers.
The study also brought into focus the existing overlap between mandates of different government agencies that have led to premature termination of projects contributing further losses to bank clients and by extension, to the banking industry. In the study, The Constitution, under Part 2 (3) of the Fourth Schedule assigned the control of air, noise pollution, other public nuisances, and outdoor advertising (“Delegated Functions”) to the County Governments. This role had been previously carried out by National Environmental Management Authority (NEMA) under the relevant Environment Management and Coordination Regulations.
Despite this re-allocation, NEMA officers continue to carry out the Delegated Functions, citing enforcement powers under Environmental Management and Coordination Regulations. Other challenges that are putting banks and investors at risk include deficient Environmental Social Impact Assessments (ESIA) by NEMA agents, especially regarding the quality of reports, ethics in undertaking the assessment and audits that lead to revocation of project licences and eventual defaults on loans granted on the strength of the licence issued by NEMA.
Speaking during the launch of the study, KBA Chief Executive Officer, Dr Habil Olaka called on policymakers to address the disparities in riparian and wildlife migratory environmental regulations. He also reiterated the need to reinforce Multi-Agency Alignment around biodiversity and environmental matters. “It is our collective responsibility to ensure the stability of the banking industry by encouraging sound risk assessment and management. By harmonizing the spatial land use plans and the wildlife laws, we can reduce the financial risks to both banks and Kenyans. We are also calling for the strengthening of the oversight of EIA experts to enhance the quality of the assessments and the ethics of the EIA experts handling the projects.”
IUCN ESARO Regional Director, Mr Luther Anukur, encouraged policymakers to create an enabling environment for developing scientific solutions backed by research as demonstrated by the report. He further added that “To deal with the triple planetary crisis of climate change, biodiversity loss and pollution, public and private actors need to work together. The transition to a blue and green economy demands recognition of the role biodiversity and ecosystems play in human social and economic affairs. In the face of climate change, biodiversity loss, growing water scarcities, rising prices for food and energy, accompanied by an increasingly unstable and risk-laden global economy, the notion of embracing sustainable finance principles in Kenya has become increasingly relevant”. He also called for increased investments from both public and private entities towards nature-based solutions to reduce exposure to environmental and social risks.
FSD Kenya CEO, Ms Tamara Cook, echoed the sentiments from KBA and IUCN by encouraging financial institutions to integrate environmental risks – both the risks of non-compliance with existing environmental laws, policies, and regulations and those associated with global and local environmental change and impact – into their business strategies and operations. This, she noted, will become increasingly important, as Kenya transits into an industrial economy status that has traditionally been associated with intensive resource consumption and pollution. FSD Kenya is keen to support the financial sector to embrace sustainable finance principles as a key enabler of the transition to a green and climate-resilient development pathway that Kenya aspires to attain. To this end, FSD Kenya has partnered and will continue to partner with KBA and other partners and stakeholders in various initiatives aimed at enhancing the capacity and capability of the sector in sustainable finance. FSD Kenya recognises that this is important if the sector is to remain competitive in an age when sustainability has become the most important currency in business.
The study also highlighted areas banks could improve on to ensure they are safeguarded from environmental and social risks. It has been recommended that banks should increase project monitoring activities to identify and avoid environmental issues.