African banks face environmental risk through their lending to environmentally-sensitive sectors, Moody’s Investors Service has said.
In a report released on Monday, Moody’s disclosed that African countries were also vulnerable to environmental risk through outsized holdings of government bonds.
The bond credit rating service revealed that the banks in Nigeria, South Africa and Democratic Republic of Congo were the most exposed to the risk.
It said the banks must address the environmental risks now to avoid credit quality and profit decline.
“Banks in Nigeria, South Africa and Democratic Republic of the Congo are most exposed to climate-related and environmental risks through their lending, which, if not properly managed, could drive a decline in their credit quality longer term.
“These risks are also exacerbated by banks’ large holdings of government securities, which, in turn, are exposed to environmental risk from rising temperatures, water scarcity and carbon transition,” Moody’s said.
The rating service explained that the African banks faced the environmental risk threats given their current exposure to environmentally-sensitive industries.
“We have developed a global heat map identifying sectors we consider most at risk from climate change. The heat map shows that many of Africa’s largest industries, like oil and gas, mining and transport, face high environmental risks, given their high inherent exposure to carbon transition or physical climate risk.
“Other large sectors in Africa, such as agriculture, pose moderate credit risk on a global scale; but given high reliance on rain-fed agriculture and vulnerability to droughts, some African economies face graver danger,” it stated.
Moody’s further explained that Nigerian banks had substantial exposure to oil and gas borrowers, who were susceptible to accelerating transition to non-carbon technologies.
Banks in DRC and South Africa also face environmental risks through extensive lending to the mining industry, Moody’s said.
“Risks are exacerbated by outsized holdings of sovereign bonds, particularly for Angolan and Nigerian banks. Exposure to government securities for the 49 African banks that we rate across 14 countries range between 15 per cent and 35 per cent of total assets.
“This compares with between six per cent and nine per cent for more advanced economies. Most African sovereigns face substantial risk from rising temperatures, water scarcity and carbon transition,” it added.
Moody’s, however, said that South African and Nigerian banks led in disclosure and adoption of environmental policies.
“These banks are farthest advanced in disclosure of their environmental risk and its management. Outside those countries, disclosure is patchy but slowly improving.”
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