To finance a climate-resilient future for the continent, financial institutions must move from passive risk management towards embedding climate considerations actively into their decision-making.
In South Africa, the 2022 KwaZulu-Natal floods caused over R17 billion in damages, disrupting supply chains and triggering a rise in non-performing loans for banks with regional exposure. With projected economic losses of up to 14% of GDP under high-emissions scenarios, and ranking 92nd out of 181 countries on the ND-GAIN index, the country’s vulnerability to climate change is already translating into asset impairments and rising insurance claims. These events show how quickly climate-related disruptions translate into financial exposure.
Financial institutions across the continent must therefore recognise climate risk as a strategic issue; one that requires integration into governance, capital allocation and long-term planning.
Climate risks are divided into two categories.
Physical risks can raise default risks for exposed borrowers. They can also reduce the value of collateral, heightening credit risk for lenders. Transition risks, on the other hand, will be felt among companies that fail to adapt and may face declining revenues, credit downgrades, or even obsolescence. For financial institutions, this can translate into increased volatility in credit and equity portfolios.
Many African economies depend on climate-sensitive sectors including rain-fed agriculture, mining and utilities, which often lack the capital buffers to absorb shocks. The interconnected nature of our modern financial systems also means a single extreme event can ripple across borders, disrupting operations and amplifying both credit and operational risks. At the same time, financial institutions must pursue climate resilience all while addressing deep-rooted socioeconomic inequalities, poverty and unemployment. It’s a lot of pressure that is intensified by shifting global capital flows, with investors increasingly avoiding carbon-intensive economies and raising the risk of stranded assets. Meanwhile, physical climate shocks threaten stability, with the potential to destabilise banking systems and erode sovereign creditworthiness. In this context, financial institutions must put climate risks on par with other financial risks.
The low carbon transition also presents a financing opportunity, which climate-related risk and opportunity assessments can help to identify. From investments in renewable energy to sustainable infrastructure and climate-smart agriculture, Africa’s climate financing opportunity is expected to reach $1.4 trillion by 2030. Globally, climate finance surpassed $2 trillion in 2024, with over half originating from the private sector. Embedding climate into finance helps to align capital allocation with low carbon growth and long-term resilience. Financial institutions that proactively fund climate-aligned investments not only mitigate risk but also unlock new revenue streams and strengthen market leadership. For example, in South Africa participants in the Renewable Energy Independent Power Producer Procurement Programme report average nominal equity returns of approximately 12%, highlighting the commercial viability of climate-aligned investment.
Expectations are changing
Regulatory frameworks across the continent are beginning to reflect the urgency of climate risk integration:
- South Africa: The Prudential Authority expects banks and insurers to assess climate risk, ensure board-level oversight, and disclose physical and transition risk exposures. The Johannesburg Stock Exchange’s Climate Disclosure Guidance encourages listed entities to report material climate-related risks and how these are managed in alignment with IFRS S2 Climate-related Disclosures. Additionally, the Draft National Greenhouse Gas Carbon Budget and Mitigation Plan Regulations will establish carbon budgets and mandatory reporting of mitigation plans for high emitters to support South Africa’s climate commitments.
- Nigeria: Central Bank’s Sustainable Banking Principles mandate the integration of environmental and social risks (including climate exposure) into credit and risk assessment frameworks and encourage public reporting.
- Kenya: The country’s 2021 Guidance on Climate-Related Risk Management, followed by its 2025 Green Finance Taxonomy and Disclosure Framework, compels banks to classify lending, disclose climate-related governance, strategy and risk-management practices and report emissions metrics from January 2027.
Collectively, these developments signal a shift from voluntary climate considerations to mandatory integration within financial oversight.
As climate-related risks become financially material, disclosure will shift from a compliance obligation to a strategic asset: early compliance will reduce the need for costly model revisions and positions financial institution ahead of regulatory curves, while transparent climate disclosures will signal governance discipline at a time where investors’ expectations are growing. For African institutions, the stakes are even higher as failure to demonstrate alignment with evolving global regulatory and market standards risks exclusion from international capital markets, limiting funding and investment opportunities when climate resilience demands it most.
From principles to practice
Despite growing regulatory momentum and the general need to preserve economies, financial institutions struggle to integrate climate-related risks into traditional risk management processes. This has led to slow decisions on adapting risk frameworks that reflect climate realities.
So where do you begin? A practical starting point is to segment assets based on financial materiality and climate exposure, as risk manifests differently depending on the business model. Asset managers with exposure to carbon-intensive sectors, for example, may face heightened transition risk, while short-term insurers are more vulnerable to acute physical events. It’s critical to tailor your climate risk assessment to your company’s priorities in order to gain strategic value.
Once a climate-related risk and opportunity assessment is complete, the next step is to embed climate risk across governance, capital allocation, existing enterprise risk management frameworks and reporting. Then, to act on it. Senior teams should map exposures and evolve investment and governance mandates to reflect climate insights. Public disclosures aligned with best practice disclosure frameworks can also guide assessments and support financial institutions’ preparedness.
Integrating climate risk into financial strategy also means considering it across investment decision-making processes, including:
- Screening and due diligence: Use climate data to identify material risks at the asset and sector level, applying explicit screening criteria for vulnerable sectors.
- Valuation: Adjust valuations to reflect carbon pricing, regulatory changes, and the potential for asset stranding.
- Portfolio construction: Balance traditional assets with green investments to align with both current mandates and future climate scenarios and support diversification.
- Monitoring and reporting: Conduct scenario analysis, stress testing and regular updates to climate-related metrics to ensure ongoing compliance and risk management.
- Engage throughout: Actively engage with investees to support their decarbonisation efforts and assess their climate exposures, which in turn shapes the financial institution’s own risk profile.
Climate risk is a financial risk. For African financial institutions, the imperative is clear: as regulatory frameworks evolve and climate data advances, those that act now will be better positioned to lead Africa’s transition to a resilient, low carbon economy.
Want to understand your climate risks and opportunities, or strengthen your organisation’s climate resilience? Get in touch, or join me and my colleague Renata Lawton-Misra in person at the JSE Sustainability Showcase on 16 September.
