Moody's: African banks face environmental risk threats

A recent report by Moody's has shed light on the environmental risks faced by African banks, highlighting the potential impact on credit quality and profitability. According to the report, African banks are at risk due to their exposure to environmentally sensitive sectors through lending portfolios and substantial holdings of government bonds. The report also points out that South African and Nigerian banks lead in disclosing and adopting environmental policies. Antonello Aquino, Associate Director for Financial Institutions Group at Moody's, elaborated on these findings in an interview with CNBC Africa. Aquino emphasized that environmental factors could lead to a deterioration in credit quality for African banks if climate-related risks are not effectively managed. One of the key challenges identified in the report is the significant amount of loans extended to sectors with high climate change exposure. African banks have reportedly lent approximately $180 billion to sectors like oil and gas, mining, transportation, and agriculture, which are particularly vulnerable to environmental risks. Additionally, the exposure to government bonds in African banks surpasses that of advanced economies, posing further risks. The impact of these environmental risks on credit quality and profitability will largely depend on how effectively banks manage their exposures. Aquino highlighted sectors such as oil and gas, mining, transportation, and agriculture as particularly sensitive to climate change. Given the concentration of loan portfolios in these sectors, African banks face potential risks to asset quality and profitability. Moody's methodology for assessing environmental risks involves mapping out sector exposures and potential vulnerabilities. The research aims to incorporate climate change risks into credit assessments, with a focus on sectors prone to environmental impacts. The report underscores the importance of proactive risk management by African banks to safeguard their financial stability. When comparing regions within Africa, the report identifies distinctive vulnerabilities. Nigerian banks, for instance, face substantial exposure to oil and gas borrowers and government bonds, making them vulnerable to carbon transition risks. South African and RC banks are also exposed to sectors like mining, which are highly sensitive to climate change. Despite variations in exposure levels, the report emphasizes the need for comprehensive risk management across all African banking systems. In conclusion, Moody's report serves as a wake-up call for African banks to address environmental risks proactively. The growing recognition of climate-related challenges underscores the importance of integrating sustainability practices into banking operations. As South African and Nigerian banks take the lead in adopting environmental policies, other African banks are urged to follow suit to mitigate environmental risks and ensure long-term financial resilience.