The Impact of climate change on the financial sector a study on the banks listed on the Nairobi Securities Exchange

Abstract

Climate change is reshaping the global financial landscape, presenting significant challenges and opportunities for Kenya’s banking sector. This study investigates the financial performance and stability of the 10 banks listed on the Nairobi Securities Exchange, analyzing data from 2009– 2023 using descriptive analysis and dynamic panel estimation through the Generalized Method of Moments (GMM). The findings reveal that larger banks are disproportionately exposed to credit defaults, stranded assets, and collateral devaluation due to their extensive lending portfolios and greater exposure to vulnerable sectors, while smaller banks face relatively lower risks. Limited investment in climate-smart practices across public and private sectors exacerbates these challenges, disrupting credit flows to high-risk industries and increasing credit risk. Despite these challenges, green finance emerges as a critical opportunity, offering banks a pathway to mitigate risks, improve financial performance, and drive sustainable development. This research underscores the urgent need for targeted resilience strategies, enhanced regulatory frameworks, and greater investment in climate-smart initiatives to safeguard Kenya’s banking sector while capitalizing on emerging opportunities for sustainable growth and financial stability.