The banking sector in Ghana plays a key role in supporting the country’s economy by helping people and businesses manage money and access loans. Recently, banks have been under increasing pressure, both from local rules and global expectations to take environmental, social, and governance (ESG) issues seriously in how they operate. Regulations from the Bank of Ghana, like the Sustainable Banking Principles and Climate-Related Financial Risk Directive, require banks to consider risks like climate change and poor corporate governance when making financial decisions.
Other guidelines from the Securities and Exchange Commission and the Ghana Stock Exchange also stress the importance of ESG integration. These rules are especially important because Ghana is vulnerable to climate problems like floods and droughts, which can hurt farming and social infrastructure, consequently impacting the financial stability of customers and impairing their ability to repay loans. Reports from groups like the World Bank warn that without action, climate change could push many Ghanaians into poverty, affecting the whole banking system. So, for commercial banks, managing ESG risks is not only about following rules, but helping build a stronger, more sustainable future for everyone.
Historical Evolution of ESG
Banks have changed how they think about ESG issues over time. In the past, ESG was mostly about doing good deeds like charity or publishing voluntary reports, mainly to protect their public image. But things started to shift in the mid-2000s with global efforts like the Equator Principles, which encouraged banks to consider environmental and social risks when giving out loans. By the 2010s, especially after the Paris Agreement in 2015, ESG became a serious part of how banks manage financial risks, with regulators and investors pushing for more accountability. Today, ESG is a key part of how banks protect themselves and the economy. Banks now look at how climate change, social issues, and good governance can affect their business and the customers they serve. This shift shows that ESG is not just about doing the right thing, but also about making smart financial decisions for long-term stability and resilience.
ESG in Risk Management
Banks in Ghana have been on a journey to discover how ESG risks can directly affect their financial stability. These risks can be direct, like floods damaging banking infrastructure and disrupting service delivery, or more indirect, like the impact on businesses that owe the bank. If borrowers struggle due to issues like droughts or poor governance, it may affect their cash flows, investments and business loan repayments, which ultimately affects the banks’ sustainability. Banks are now encouraged to focus on two parameters: how environmental, social, and governance issues affect their clients, and how the banks’ own actions or lack thereof might contribute to such challenges.
This model of thinking, called “double materiality” helps banks to understand both the risks they face and the impact they have, so they can make smarter, more responsible decisions. For example, if a bank gives money to a company that pollutes the environment, it could damage the bank’s reputation and cause people to lose trust in it. On the other hand, if the bank lends to a business that’s struggling because of water shortages, that business might not earn enough to repay the loan, which could lead to financial losses for the bank.
This shows how real-world problems can affect both the bank’s image and its profits. The double materiality approach helps banks to take a more forward-looking view of ESG risks by considering how these risks affect the bank and how the bank’s actions affect the environment and society. This means ESG risks are not treated as side issues but are built into the bank’s overall strategy and risk assessments, helping them make better decisions.
How banks should approach ESG integration
ESG risk management framework creates an enabling platform to handle environmental, social, and governance risks in a clear and organised way, making sure these risks are considered throughout their decision-making process. By applying ESG across areas like governance, strategy, risk evaluation, and public reporting, based on a model developed by KPMG International, banks can consistently track and respond to these risks, which helps them stay strong and support long-term sustainability.
Governance
A strong governance structure is key to helping banks manage ESG risks effectively. Instead of treating ESG as a separate issue, banks should make sure ESG considerations are part of everyday decision-making at the Board level and across all departments. This means teams responsible for lending, trading, compliance, and auditing must all consider how environmental, social, and governance factors could affect financial performance and reputation. Whether it is checking how climate risks might impact financial services, such as a loan or ensuring the bank follows ESG regulations, every part of the organisation plays a role in making ESG a regular part of how the bank operates.
Risk Strategy
To support sustainable development, banks need to build a risk strategy that fits closely with their overall business goals and clearly reflects why they are integrating ESG, whether it is to meet regulations, attract investors, or make a positive impact. This means ESG should be part of everyday planning, product design, and decision-making, not just a side activity. As ESG becomes more central, senior leaders must take an active role in guiding how it is managed. By doing this, banks can better prepare for long-term challenges or shifts in public expectations and ensure their operations remain stable and trusted.
Risk Management Cycle
Integrating ESG risks into a bank’s risk management process means looking at how environmental, social, and governance issues could affect the bank and its clients at every stage, from identifying risks to planning for disruptions. These risks are often complex and interconnected, such as how a force of nature could impact Stanbic Bank’s services, repay a loan or how poor governance could lead to legal trouble. To manage them well, banks need to expand their risk tracking systems to include ESG factors, train staff to understand these risks, and use tools like scenario planning and stress testing to prepare for long-term impacts.
Measurement and Evaluation
Measuring ESG risks means figuring out how environmental, social, and governance issues could affect a bank’s financial health. These risks often show up in familiar areas like credit, market, or operational risk. To evaluate them properly, banks need experts who can turn complex scenarios, like climate models, into clear business impacts. A key part of this process is checking how exposed the bank already is to ESG risks and including that in how much capital it requires to remain stable.
Assessment of current ESG exposure
To understand how exposed a bank is to ESG risks, it must use available data and tools to run early stress tests, especially for climate-related scenarios. This means analysing how things like extreme weather or policy changes could affect its clients and operations. Banks need to adjust their existing risk models or create new ones to estimate these impacts and apply consistent ESG assumptions across all areas of risk. This helps to ensure that ESG risks are properly measured and factored into financial planning and decision-making.
Steering
To manage ESG risks effectively, banks need clear goals and practical tools built into their overall business and risk strategies. This includes setting limits on acceptable ESG risks, choosing which companies to support or avoid, and regularly checking if these measures are working. Banks should also track ESG risks using dashboards and share this information with decision-makers. Transparent reporting is essential. This can be achieved either by integrating ESG considerations into existing risk reports or by developing dedicated ESG reports that highlight long-term impacts. This is particularly important because environmental and social risks often take time to fully materialise.
Disclosure and External Reporting
Banks and other public companies are now expected to share clear and detailed information about how they manage environmental, social, and governance (ESG) risks. This includes reporting on issues like climate impact, employee welfare, and anti-corruption efforts, along with how these risks are handled and measured.
As global standards evolve, Ghana is also aligning with these changes, especially through the Institute of Chartered Accountants, Ghana (ICAG)’s adoption of the International Financial Reporting Standards (IFRS) S1 and S2. These new standards require banks to provide more forward-looking and transparent ESG disclosures. This ensures that regulators, investors, and the public receive consistent, reliable, and decision-useful information.
In conclusion, ESG integration in Ghana’s banking sector is not just a trend; it is both a voluntary and regulatory expectation. Through policies like the Bank of Ghana’s Sustainable Banking Principles and Climate Risk Directive, banks are now guided to embed ESG into their risk management practices. These rules, along with guidelines from the Securities and Exchange Commission and the Ghana Stock Exchange, promote transparency and align local practices with global standards. The recent adoption of IFRS S1 and S2 by the Institute of Chartered Accountants, Ghana (ICAG), further strengthens this shift, ensuring that banks report ESG risks and performance in a clear, consistent, and forward-looking way. Together, these efforts are shaping a more responsible and resilient financial system.
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Joseph Amo Adjei is Manager, Sustainability with Stanbic Bank Ghana
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