As countries strive to meet the UN’s Sustainable Development Goals (SDGs), Africa faces the challenge of balancing growth with environmental concerns.
The continent has around 17% of the world’s population but produces less than 4% of global emissions. However, roughly 600 million people on the continent still don’t have electricity. As the continent seeks to provide minimum standards of living, natural resources will need to be used, which will result in more carbon emissions.
Financial institutions have an important role to play in this equation in terms of capital allocation.
The importance of responsible banking
Absa Group is one of Africa’s largest diversified financial services groups with a presence in 14 countries. In 2019, it became one of the founding signatories of the UN’s Principles for Responsible Banking (PRBs), committing to strategically align its business with the SDGs and the Paris Agreement on Climate Change.
The Principles provide banks with a comprehensive framework for systematically and consistently building sustainability into every business area. Currently, more than 250 banks representing over 40% of banking assets worldwide have become signatories.
Elené van Reenen, Principal Risk Officer: Sustainability Risk at Absa Group, explains that the PRBs provide a framework of six principles, designed to ensure that signatory banks’ strategy and practice align with the vision society has set out for its future, as detailed in the SDGs and the Paris Climate Agreement. She believes that banks should be in a position to incentivize climate-sensitive finance to ensure a responsible and just transition to greener power sources.
“Banking would not exist if it wasn’t for investors and our customers. They instil significant trust in us,” she says. “Banks play a vital role in economies, and we have to conduct ourselves in a responsible way, promoting sustainable activities that support a clean environment, vulnerable populations and human rights. To me, that’s what ‘being responsible’ is, it’s about being a force for good in the communities where we have a presence.”
Climate change presents an urgent global challenge with significant socioeconomic consequences and it calls on every part of society to respond rapidly. Van Reenen however highlights that there is a responsibility in the way that the transition is managed. For example, putting a stop to financing certain sectors overnight could severely damage economies and exacerbate poverty and inequality, which are already pressing issues in Africa.
“Responsible banking means taking the good and the not so good into consideration, and taking a measured, pragmatic approach,” she says. “We need to set definite targets that are achievable, and that are good not only for business or the environment, but benefit people and economies too.”
By signing up to the Principles, Absa has made a commitment to using its products, services and relationships to support and accelerate the fundamental changes in economies and lifestyles necessary to achieve shared prosperity for both current and future generations.
Putting principles into practice
Van Reenen says that committing to the Principles means taking a transparent approach and reporting on progress made in terms of implementation. For example, Absa Group publicly released its 2020 Principles for Responsible Banking Report.
The Principles have been a catalyst for many sustainability initiatives within the bank. For example, Van Reenen says that Absa has partnered with the Council for Scientific and Industrial Research (CSIR), South Africa’s central scientific research and development organisation, to pilot climate change scenarios, extending the findings initially to cover the bank’s real estate and agriculture book, which jointly comprise almost half of its South African loan book.
“We are analysing our portfilio and assessing how changing weather patterns will affect a particular region, and associated social impact, and then who we’re banking there and how we could advise them and empower them to respond appropriately,” Van Reenen says. “We will be using the research results to create an interactive website, which will constantly be updated with newh data for internal use to create one source of information to the benefit of our clients and internal decision making. We’re working to expand this to be a pan-African initiative.”
Absa is also a member of the National Business Initiative (NBI), a voluntary coalition of businesses working towards sustainable growth and development in South Africa, and collaborated on research in the lead-up to COP26, the UN Climate Change Conference that was held in Scotland in November.
The bank recently hosted an event, titled “Road to COP26: Opportunities, Challenges and the African Transition to Net-Zero”, in partnership with the Group of Thirty (G30), an independent global body of which Absa is a strategic partner. The G30 aims to deepen the understanding of global economic and financial issues, and to explore the international repercussions of decisions taken in the public and private sectors.
At this forum, Dr Vera Songwe, executive secretary of the Economic Commission for Africa, noted that if appropriate finance is sourced, rapid investment in the energy sector can change the development trajectory of the African continent.
Africa can increase energy access, create jobs and keep carbon emission lower than it might otherwise have been,” Dr Songwe says. “A recent analysis, undertaken by the Economic Commission for Africa based on country case studies done with Oxford University and Vivid Economics, has shown that job creation and gross value addition are dramatically stronger when a low carbon investment pathway is taken.”
Absa is determined to take the lead in this regard. It was the first South African bank to announce sustainable finance targets and has set a target of financing or arranging R100 billion (roughly £4.93 billion) for environmental, social and corporate governance (ESG) projects by 2025. It has also arranged financing for 46% of projects under South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme. Absa was also the first African bank to voluntarily disclose its book expsosure to climate sensitive sectors, with its taskforce on climate-related financial disclosures.
In addition, the bank and African Rainbow Energy & Power (AREP), founded by South African mining billionaire businessman Dr. Patrice Motsepe, have established a substantial renewable energy platform, subject to the fulfilment of various conditions. It will have about R6.5 billion in gross assets initially and will invest in selected renewable energy technologies, including solar, wind, concentrated solar power (trough), biomass and other solutions.
The initiative expands the pool of funding available for renewable energy development at a time when South Africa is accelerating plans to address its energy shortage and expand its renewable energy base.
Van Reenen says that Absa acknowledges the social and environmental dilemmas facing the continent and banks’ ability to responsibly influence sustainability. “With our declaration to the Principles for Responsible Banking, we affirm and express our willingness to assume an active leadership role in bringing about sustainable changes in Africa,” she says.