The African Natural Capital Alliance (ANCA) and FSD Africa have released a report detailing the findings of the nature stress test conducted on the banking systems of five African countries, including Rwanda and Zambia.
ANCA was established in 2022 by FSD Africa which acts as the vehicle to drive coordinated advocacy and action across the continent. The report, “Nature Stress Test: Assessing Exposure of Five African Banking Systems”, is the first to assess the implications for African economies of the Kunming-Montreal Global Biodiversity Framework (GBF) which was agreed in December 2022 and sets out goals and targets to halt and reverse nature loss by 2030. The report, conducted in partnership with McKinsey, examines how business profits could be impacted depending on different nature-positive transition scenarios. It finds that an orderly transition scenario, where businesses adopt nature-positive practices, showed the lowest financial risks while a disorderly transition, where businesses do not substantially reduce their negative impacts on nature, profit losses in critical sectors like agriculture and mining could reach up to 50% leading to job losses.
“Understanding the profound impact of nature on our economies is crucial. This stress test highlights the urgent need for nature-positive transitions, revealing that 62% of Africa’s GDP is deeply linked with natural services. By embedding nature protection within our regulatory frameworks, we can not only mitigate financial risks but also drive sustainable economic growth.” Dorothy Maseke, Head of the ANCA secretariat and Lead, Nature Finance & TNFD, FSD Africa commented.
With 62% of Africa’s GDP reliant on nature, and 70% of sub-Saharan communities depending on forests and woodlands, the findings underscore the critical need for robust financial strategies to mitigate nature-related risks.
In the findings, financial institutions heavily invested in agriculture, mining, and food sectors may face significant risks and even solvency issues, especially in countries with specialized lenders.
Further, higher production costs and prices for agricultural goods could also result in higher food prices and inflation.
“Our findings highlight the imperative for businesses and policymakers to work together in creating resilient financial systems that can withstand nature-related shocks while contributing to a sustainable future.” Jason Eis, Partner, McKinsey Sustainability said.
Increases in export costs due to nature-related risks could harm international competitiveness and create foreign exchange risks for countries that heavily rely on exporting primary commodities, such as Ghana, Rwanda, and Zambia.
Additionally, if no nature-positive actions are taken, cumulative expected credit losses could increase by up to 21% by 2050.
The report concludes that orderly transition could significantly reduce these risks, with some countries potentially mitigating up to 78% of exposure-weighted profit losses.
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