“The Banking Sector’s Approach to Adapting to Climate Change”

According to the World Risk Report 2023, Mauritius ranks the 106^th country – out of 193 – most vulnerable to climate disaster risk. Agriculture, energy production and supply, manufacturing, the tourism sector, and construction are the five sectors most vulnerable to climate change, as per a survey by the Bank of Mauritius (BoM). The central bank is acutely aware of the direct impact of climate change on the Mauritian economy and the banking sector, particularly regarding the transition to a more resilient economy. 

The central bank considers that climate change and environmental degradation have emerged as major global concerns, second only to the COVID-19 pandemic. In the World Risk Report 2023, Mauritius is highlighted as the 106^th most vulnerable country, out of 193, to climate disaster risk. In October, the Bank of Mauritius (BoM) conducted a survey identifying the top five vulnerable sectors in Mauritius, and they are as follows: agriculture, energy production and supply (electricity), manufacturing, tourism, and construction.

“We need to adapt to the new norms and ensure the safety and soundness of our financial system. The Bank of Mauritius established the Climate Change Centre in October 2021 to integrate climate-related and environmental financial risk into regulatory supervision and the monetary policy framework. The guideline, launched last year, advocates a prudent approach to climate-related and environmental financial risk, enhancing the banking sector’s resilience. It outlines how financial institutions, particularly regulators, must implement frameworks and internal structures, along with internal controls, to understand, identify, assess, monitor, and mitigate climate-related and environmental financial risk,” stated the Second Deputy Governor of the Bank of Mauritius, Mrs Hemlata Sadhna Sewraj-Gopal, in an online training session on climate change, which was a joint initiative of the Mauritius Institute of Directors (MIoD) and PwC Mauritius.

The guideline covers five crucial areas, with the first focusing on business models and strategies. It recommends starting at the board level, raising awareness and understanding of climate change’s impact on the business. At the governance level, board directors should regularly include climate change on their meeting agendas. Banks are expected to submit stress testing and scenario analysis to assess their readiness for capital and liquidity requirements.

“We face pressure from international agencies regarding how banks disclose their ESG footprint. Although the guideline requested full disclosure by December 2023, we revised the deadline due to challenges faced by commercial banks,” emphasized the Second Deputy Governor.

The BoM engaged with board directors, bankers, and the public to explain how climate change translates into prudential risk, operational risk, credit risk, market risk, and liquidity risk. The central bank collaborated with stakeholders, signing a memorandum of understanding with the Ministry of Environment, Solid Waste Management, and Climate Change. They worked to identify physical risk drivers and assist banks in evaluating climate risk. Collaboration with the Ministry of Financial Services and Good Governance aimed to develop a taxonomy for Mauritius, identifying risk factors and setting standards.

The Second Deputy Governor highlighted that there are not only risks, but also opportunities for the banking sector with climate change. Banks are expected to be aware of these risks and opportunities at the board level, incorporating them into business modelling and strategy, according to the central bank.

In engagement with other regulators, the BoM acknowledges challenges in disclosing forward-looking data. The central bank has requested only partial transitory disclosure, informing banks through correspondence. Currently, the central bank of Mauritius only requires full disclosure on governance metrics, strategy, and risk management metrics. The Second Deputy Governor emphasized that metrics related to targets and full disclosure requirements would be addressed later, pending the availability of more data for stress testing and assessing carbon footprints.

The local banking sector is expected to strengthen its resilience and become more robust in response to the challenges posed by climate change. Existing data indicates progress in providing environmentally friendly facilities to clients of commercial banks. During the period from June 2022 to June 2023, the disbursement for green loans in Mauritius increased from MUR 4.2 billion to MUR 6.9 billion. Simultaneously, the number of loan applications for green projects rose from 308 to 470. These figures are deemed encouraging, reflecting a positive trend in the sector’s commitment to sustainable initiatives.