Ghana launches push to turn banking sector green

The Bank of Ghana has urged banks to implement environmental and social risk management policies, as part of a broader effort to clean up the banking sector.

The central bank has published an extensive set of sustainable principles following an increase in lending to areas which have adversely affected the environment and social standards.

The seven principles, the central bank says, will be applied across five sectors of the economy and will be enforced by the Sustainable Banking Principles Committee, which was established in 2015.

The principles will provide guidance to banks on issues including “human security”, anti-money laundering, social responsibility, transparent communications and disclosure, reputational risk and climate change.

In addition to environmental and social risk management, the central bank has also urged the banking sector to adopt polices focused on financial inclusion, gender equality and corporate governance.

Changing sector

Over the last decade, Ghana’s banking sector has grown quickly. According to central bank data, as of September 2019, Ghana’s banking sector held total assets of 115.2 billion cedis ($20 billion).

While the central bank acknowledged a lot of successful projects had been financed by the banks, there was an increased amount of lending allocated to less sustainable causes.

“Banks’ funding is often used for activities which impact adversely on the environmental quality and social standards,” the central bank says in the document.

The central bank now expects banks to identify and assess environmental risk exposures before looking at ways to mitigate them. Banks have also been asked to promote environmental and social practices within their own businesses.

Suggestions on how to reduce a bank’s carbon footprint listed by the central bank include reducing the use of lights and air conditioning, and minimising business travel. The regulator also suggests reducing the consumption of paper.

To ensure these practices are adhered to, the Bank of Ghana has recommended drafting a new code of conduct which would be adhered to by all bank staff. Banks could also appoint a ‘sustainability champion’, the central bank says.

Do not engage

“Banks may incur reputational, legal or credit damage if they or their clients have poor corporate governance or weak ethical standards,” the central bank notes. Corporate governance comprises the third principle in the document.

The Bank of Ghana has provided a framework for banks to follow when addressing these concerns for new and existing clients.

For new clients, the central bank has advised firms that in cases where corporate governance is poor they may need to abandon the business opportunity altogether. Alternatively, banks may look to “restructure the size or tenure” of the transaction with the business and require the new client to adhere to a new “action plan” before the opening of an account or disbursing funds.

Existing clients however, banks can lean on existing loan documentation, the central bank says. This documentation “may state that a failure to comply with legislation constitutes an event of default, allowing the bank to demand repayment of sums owing”.

However, the Bank of Ghana also advises banks to get their clients to agree to a new action plan and – where needed – provide training to help employee’s spot poor governance and unethical behaviour in clients.

Balancing the scale

While much of the document lends itself to addressing environmental issues, two of the central bank’s principles focus on diversity within the workplace. “Inclusive participation in economic life is critical in building stronger economies,” the central bank says.

To combat gender inequality – an issue that plagues the entire banking sector, regulators say – the central bank has urged financial firms to pay their employees equally. Banks have also been asked to ensure existing and new workplace policies are “free from gender-based discrimination”.

The Bank of Ghana urges banks to remove unconscious bias from their recruiting processes. “Ensuring that a candidate’s gender is hidden when applications are reviewed” is a good place to start, the central bank says. Interview panels should also be made up of both men and women.

Assessing progress

While there is no obvious timeline for banks to implement the new principles, the Bank of Ghana will assess the implementation through three phases.

During the first phase, the central bank only expects banks to describe measures they have taken. This qualitative reporting will be submitted to the central bank for review. In the second phase, the central bank expects the banks to include evidence – this can be though data and select key performance indicators. In the third phase, banks will be expected to demonstrate their continued adherence and set new targets.