Why financial industry must act now to mitigate climate losses ahead

The global financial services industry is bracing for potential climate-driven losses of up to Sh232.5 trillion ($1.8 trillion) by 2050, which could significantly impact companies unprepared for such risks. Currently, only 25% of financial services firms globally have set measurable Environmental, Social, and Governance (ESG) targets, with a focus on traditional profitability indicators like ROE, ROI, EBITDA, and embedded value. However, the increasing financial risks posed by climate change, such as unseasonable weather patterns, severe droughts, and heightened insurance claims, necessitate a shift towards integrating sustainability into core business strategies. The concept of Profit Plus emphasizes the need for profitability to go hand in hand with sustainability, creating value for shareholders, society, and the environment. The frequency of climate-related disasters is driving up insurance costs and increasing loan default risks, making it crucial for financial institutions to incorporate these risks into their strategies. To operationalize ESG principles, financial institutions must set clear, actionable goals, such as reducing operational costs through energy efficiency, offering green loans for sustainable projects, and expanding financial inclusion through microinsurance. These initiatives not only address environmental concerns but also drive growth in areas that will become increasingly critical as regulations tighten and consumer preferences shift. In conclusion, integrating ESG into financial operations is essential for long-term profitability and relevance in a rapidly changing world. Financial leaders must align their ESG initiatives with financial goals and invest in areas that create value under the Profit Plus framework. The decisions made now will determine not only profitability but also the legacy and sustainability of the industry. Together, financial institutions can build a future where sustainability and profitability go hand in hand, creating a legacy that can be proud of.

Source: capitalfm.co.ke
Published on 2024-09-16