Study of commercial banks’ responses to climate change; a case of commercial banks in Kitui County Kenya

Abstract

The world has set targets to reduce the global warming that requires every sector of the economy to take measure to mitigate climate change. Banks and other financial institutions can play a central role in achieving these targets since climate change presents financial risks that should be treated accordingly. To assess and manage these risks, banks should apply scenario analysis and adopt climate related risk disclosure recommendations. This study analysed how Commercial banks operating in Kitui Town have adopted different response initiatives related to climate change risk disclosures, how they implement and report these scenarios and the effect of adopting these initiatives to the banks’ performance. Empirical data was collected through questionnaires distributed to 65 respondents working in the ten commercial banks operating in Kitui Town.. The questionnaire response rate for the study was 93.3%. The collected data was analyzed using Ms excel and SPSS statistical software. From the study, it was indicative that banks are in a learning phase characterized by uncertainty and lack of data that may affect strategic scenario analysis decisions especially when disclosing climate related information. In spite of this, the study established that 42% of the respondents consider climate change and environmental risk as major risk with 25.7% considering it as an average risk. The study also established that Kitui commercial banks are faced mostly faced with ligation and regulatory risks at 35.7%. This was closely followed by financial risks and then credit risks at 25.7% and 15.7% respectively. On adoption of climate change response initiatives, corporate governance initiatives were most adopted with 70% of respondents reporting to this adoption. On the other hand, climate change disclosures were the least adopted imitative. Here, over 65% of respondents lack adoption on this initiative. On the impact of the response to performance, it was determined that the climate change response initiatives had a significant positive impact on the commercial banks’ performance. Climate change strategy imitative had the highest impact on banking performance (rho=0.6530, p-value <0.05) while corporate governance had the second highest impact on banking performance (rho =0.608, P value <0.05). Climate change disclosure and disclosure had (rho =0.608, P value <0.05 and rho =0.608, P value <0.05) respectively. The study recommended that commercial banks and other institutions need to reevaluate the exposure to climate change and environmental risks, encouraged to develop and adopt climate change policy and corporate governance parties, and the bank regulator to structure a universal carbon reporting and exposure calculation method and policy. This will improve the accessibility of needed data for establishing standard models and common practices for enhanced transparency and accountability. This study recommends further research to be replicated in other towns to study environmental policies, effectiveness to respond to climate change and on the less adopted initiatives.