SUSTAINABILITY AND CLIMATE RISK REPORTING – A SACCO PERSPECTIVE

By Robert Kanyua

The Climate Crisis is deepening and bringing along adverse and significant impacts across all sectors. The all too familiar threats occasioned by climate change include flooding, drought, unpredictable seasons and weather patterns that have turned hitherto fertile lands into deserts. Accordingly, the loss and damage associated with climate change impacts keep on growing. Yet, even as the consensus around climate risk reporting becomes stronger, not all financial services firms have embraced the practice. How should financial services firms approach climate risk reporting, and specifically, why must Savings and Credit Cooperatives (SACCOs) embrace Climate Risk Reporting?

The Impact of the Climate Crises

The impacts of the climate crises extend beyond the environment to impact business. Even where slower-moving weather events like droughts and coastal erosion are not so apparent, their impacts contribute to economic erosion. That is why the climate change risk mitigation agenda should concern companies greatly just as it concerns nations across the world.

Climate-Related Risks & Their Connectivity to Business

The nexus of Climate Risk and Business Sustainability is becoming clearer. It is now evident that Climate change presents economic risks as it impacts the long-term growth of the organization and in certain instances business continuity.

As each year passes by climate risks are becoming greater and the potential for loss is becoming higher. Climate change impacts such as flooding along the water bodies have led to loss of businesses in Kenya amounting to millions of shillings.

In the financial services space, climate-related risks include and are not limited to, loss of markets and debt defaults. When climate risks actualize, they heap pressure on the balance sheet and profitability of a business.

Climate risk reporting will enable SACCOs to identify climate-related risks, prepare for shocks and recover quickly whenever they occur. It helps financial services firms unearth links invisible or not-so-apparent risks to the physical world.

The Importance of Climate Risk Reporting for Financial Services Firms

Financial services firms have a responsibility to safeguard the assets and value of their shareholders.

Even though climate-related risks are not limited to SACCOs, they are particularly vulnerable as a majority of their members are directly or indirectly dependent on agriculture for income or well-being. Indeed, in the recent past, SACCOs have been particularly impacted by the dwindling incomes of their members who rely on this sector.

Additionally, the role of cooperatives in SME development is set to expand as Small and Medium-sized Enterprises become significant economic players in the country. We anticipate the level of economic threat posed by climate-related risks to also rise as more SMEs onboard as SACCO members.

SACCOs must seek to understand the impacts of climate-related risks within the multiple sectors where their members operate. A potential challenge is that SMEs operate in multiple sectors that are impacted differently by climate change. Without proper climate risk reporting, SACCOs run the risk of failure if SMEs in certain sectors or regions face an uncertain future and begin to be a drag on their liquidity and members’ savings mobilization.

Given that climate-related risks can lead to a drastic reduction in members’ income and loan defaults, climate risk reporting will help SACCOs prepare to make the shift from the safe terrain of employer ‘check-off’ loan system to serving their business members.

Climate Risk Reporting, A Proactive Strategy

Most publicly owned firms produce and disseminate various reports including the regularly published annual report to shareholders. However, more often than not, these reports do not disclose climate-related risks or at best mention them in passing.

Globally, there is a push to leverage climate risk reporting to mitigate climate change risks. Regulators in the financial services sector have responded to the climate change threat by enacting guidelines to help build a better, solid and more sustainable future for financial services firms.

In Kenya, The Central Bank of Kenya introduced Guidance on Climate-related Risk Management for licensed institutions under its purview. Now climate risk reporting will feature more prominently to ultimately inform credit and investment decisions.

Whereas reporting itself does not eradicate climate-related challenges it goes a long way towards enhancing preparedness, monitoring and enabling prompt intervention where necessary.

It is my view that Climate Risk Reporting should be mainstreamed and go beyond best practices.

Priority Actions – How SACCOs Can Deal with the Widening Risk Landscape

An organization that assesses and reports on climate-related risks is less likely to be caught flat-footed by the occurrence. Below are two priority actions that SACCOs can adopt to address these risks.

First, assess your SACCOs risks and evaluate their impacts. This will enable you to have a deeper understanding of the risks to enable you to make decisions that reduce your risk profile.

The second is to report on all material risks – both current and emerging. This has the benefit of making you thoughtful and deliberate in decision-making about where and when to allocate your capital. Decision-making may entail revising your lending policies based on the disclosure results.

Assessing and reporting and monitoring climate-related risks helps you in strategic planning. As you continuously monitor current and emerging risks, you get an opportunity to devise mitigating measures and course-correct if the risk situation deviates from its target level. This minimizes the likelihood of impact and the severity of climate change shocks on the organization.

More importantly, appropriate climate risk information can help SACCOs identify new opportunities for growth and develop new products. Also, climate risk reporting will enable SACCOs to make informed investment and credit decisions.

Going forward, it is clear that climate-related risks will increase and hence the need to be proactive. Now is the time to embrace climate risk reporting even in the absence of any legislation. The payoff is in preparedness, better allocation of capital and in informing strategy. Hopefully, these benefits add impetus to the push for climate risk reporting.

The writer is a Consultant and Sustainability Expert with Pro Excellence Management Consultants.

You can reach him at robert@proexcellence-management.com / www.proexcellence-management.com