06 May 2021

The climate risk exposure of Kenyan banks

How much are Kenyan banks exposed to climate risk and how much of that risk do they fund through their loan portfolios? In his master dissertation, Reuben Muhindi Wambui constructs two indices to answer those questions. His findings, which he details in this interview, won him the 2020 Rudi Dornbusch Prize in International Economics and are now published in open access as part of the Graduate Institute ePapers, thanks to the support of the Vahabzadeh Foundation.

How did you come to choose your research topic?

I had been thinking about sustainability and financial risks for a while after winning the St. Gallen Symposium award for my essay on sustainable finance interventions. However, my specific interest in climate risks only came about when I was working at Credit Suisse in Zurich on applying the draft EU taxonomy to the bank’s sectoral lending. At the same time, I got exposed to implementing recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in a banking context. When it was time to choose a topic towards the end of graduate school, I realised that existing literature had very little actual quantification of climate-related financial risks for banks in developing countries. I decided to start from home and analyse Kenya’s banking industry.

How do you formulate your research questions and what is your methodology?

My dissertation seeks to answer two questions. First, how much is each Kenyan bank exposed to climate risk, given the greenhouse (GHG) emissions represented by its sectoral loan composition loan portfolio? This I answer by constructing an emissions exposure index, a measure of a bank’s climate risk exposure through its loan portfolio. Secondly, how much of the climate risk attributed to GHG emissions does each Kenyan bank fund through its lending relative to other banks? I answer this by constructing an emissions funding index, a measure of climate risk importance for each bank given its relative industry lending. 

And what are your answers?

Results from the emissions exposure index show that the banks, with the exception of an outlier, have a fairly similar exposure to GHG emissions based on their sectoral lending composition. On the funding index, banks have differentiated funding of climate risk through their lending that is fairly proportional to their market shares of gross loans. Thus, bigger (smaller) banks have higher (lower) funding of climate risk. The two indices provide a set of two complementary climate-related quantitative metrics comparable across Kenyan banks. 

Will the banks use your indices? 

I have familiarised different actors within Kenya’s banking industry, including at the Central Bank of Kenya (CBK), with my study. The findings are indeed particularly useful in that they provide a set of analysis and decision-useful information for the CBK and other regulators to think about when formulating policies aimed at enabling a low-carbon transition within the finance industry. 

What are you doing now?

Currently, I work as the Africa Regional Coordinator at UNEP Finance Initiative (UNEP FI), where I lead the regional work strategy and programme delivery across UNEP FI member banks and insurers in Sub-Saharan Africa. This includes providing support for the implementation of the UN-led Principles for Responsible Banking (PRB) and Principles for Sustainable Insurance (PSI). In the role, I get to see first-hand the challenges, and also the opportunities, for financial institutions in Sub-Saharan Africa working to mainstream sustainability and to address the triple planetary challenge (climate, nature and pollution) across their business operations.

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This ePaper was published thanks to the financial support of the Vahabzadeh Foundation. It reproduces Reuben Muhindi Wambui’s master dissertation in International Economics (supervisor: Cédric Tille), which won the 2020 Rudi Dornbusch Prize in International Economics.

Full citation of the ePaper:
Wambui, Reuben Muhindi. Climate-Related Financial Risks for Kenyan Banks: An Analysis of Loan Portfolios and GHG Emissions. Graduate Institute ePaper 37. Geneva: Graduate Institute Publications, 2021.

Interview edited by Nathalie Tanner, Research Office.
Banner picture: excerpt from an image by Sergiy Palamarchuk/