Africa’s economies rely heavily on its rich biodiversity, which is essential for building a nature-inclusive banking system that supports sustainable development. However, climate change is increasingly straining these ecosystems, creating significant risks to the continent’s financial stability.
Recognizing this, African financial regulators are increasingly integrating nature-related risks into their frameworks, in line with the Basel Committee on Banking Supervision’s three-pillar framework.
According to the United Nations report, Climate Risk Regulation in Africa’s Financial Sector, Africa is one of the regions most exposed to climate change, with half of the 10 countries most vulnerable to its impacts located on the continent.
Understanding the Basel Framework
The Basel framework and its three pillars provide a global standard for banking regulation. Pillar 1 – Minimum Capital and Liquidity Requirements: This pillar ensures that banks have adequate capital based on risk-weighted assets (RWA) to cover risks.
Pillar 2 – Supervisory Review Process: This pillar emphasizes the role of oversight by regulators, assessing how banks manage risks, including environmental risks.
Pillar 3 – Market Discipline: This pillar requires banks to disclose relevant risk exposures to enhance transparency and market discipline.
Basel’s approach is ever evolving to cover climate risk management.
“Banks need globally consistent regulatory standards to address nature risks effectively. Prudential frameworks must evolve to reflect the real costs of biodiversity loss,” says Romie Goedicke den Hertog, UNEP FI Nature Team Co-Lead.
Integration in Africa
To be able to mitigate and adapt to the degradation of the ecosystem as a result of climate change, African financial regulators are increasingly incorporating nature-related risks into their supervisory processes.
For instance, Uganda’s National Environment Act (NEA) of 2019 mandates that biodiversity offsets address residual environmental impacts, aiming for measurable conservation outcomes.
Additionally, South Africa’s Prudential Authority released guidance notes on climate-related disclosures, governance, and risk management for banks and insurers, aiming to integrate environmental risks into the financial sector’s core operations.
In October 2024, the Central Bank of Kenya released a draft climate risk disclosure framework, emphasizing the importance of integrating climate-related risks into financial reporting. Other countries like Ghana and Morocco have also issued Sustainable Banking Principles to guide banks in incorporating environmental and social risk management into their policies.
Moreover, transparency practiced by the financial sector through disclosure has been crucial for managing nature-related risks. Reliable data also enables banks to assess and disclose their dependencies and impacts on nature. Understanding the complex characteristics of nature-related risks is essential for accurate assessment and management.
Challenges in Integration
Despite the crisis, integrating nature-related risks into minimum capital and liquidity requirements remains a challenge. Unlike climate risks, nature-related risks are harder to quantify due to the complexity of biodiversity and ecosystem interdependencies. This has resulted in data gaps.
Despite African regulators working towards developing policy frameworks to incorporate environmental risks into capital requirements, financial institutions may resist stricter capital requirements for nature-related risks, citing concerns about competitiveness and capital constraints.
Furthermore, global banking regulators are still debating whether nature-related risks should be classified as financial risks under Basel’s capital adequacy requirements.
Saliem Fakir, Executive Director of the African Climate Foundation, says that central banks are now considering the links between their mandates and managing climate-related risks, including the rising impacts on food security.
“Nature-inclusive banking to deal with financial risks that is they must be assessed and integrated into regulatory frameworks. The stability of the financial system depends on it,” says Frank Elderson, European Central Bank Executive Board Member.
