Corporate governance, resilient banking, bedrock for sustainable future
By Prof. Samuel Lartey
Introduction
AS climate-related risks grow more pronounced, central banks worldwide are prioritizing resilience within their financial sectors.
In Ghana, the Bank of Ghana’s Climate-Related Financial Risk Directive, with phased compliance deadlines through December 2026 and implementation starting January 2026 for banks and January 2027 for other financial entities, signals a commitment to addressing these issues at a structural level.
Yet, compliance requires more than meeting deadlines; it hinges on robust corporate governance, sound risk management, and an adaptive mindset within financial institutions.
This directive is timely, as Ghana’s banking sector, previously marred by governance lapses, moves toward renewal. By examining the core principles of good corporate governance and the pitfalls of past practices, we can better understand what is needed for Ghana’s financial institutions to thrive in the face of climate-related challenges.
Corporate Governance: The Bedrock of Resilient Banking
Good corporate governance is essential in ensuring transparency, accountability, and resilience. It encompasses a variety of practices:
- Board Oversight and Accountability
A strong board is crucial for sound decision-making and risk oversight. In Ghana, many banks in the past experienced governance lapses because of board inexperience or lack of clear mandates, undermining trust and operational stability.
- Risk Management and Internal Controls
Corporate governance also involves setting up effective internal controls to monitor risks continuously. The Bank of Ghana’s directive now demands attention to climate-related financial risks, urging banks to establish structures to evaluate and mitigate these risks.
- Transparency and Disclosure
Public trust depends on transparency. For Ghana’s financial institutions, transparent reporting, particularly on environmental, social, and governance (ESG) impacts will help investors, and the public understand how banks are managing climate-related risks.
- Long-Term Orientation and Ethical Leadership
Sustainability requires leadership focused on long-term gains. Ghanaian banks must shift from short-term profit-driven strategies to prioritizing climate and ESG considerations, positioning themselves as responsible agents of economic growth.
The Genesis of Corporate Governance in Ghana’s Banking Sector
Corporate governance gained prominence in Ghana in the 1990s and early 2000s, paralleling global trends. Yet, governance principles, often narrowly applied or misunderstood, failed to prevent systemic risk and instability.
By 2017, many banks faced liquidity crises, and in 2018, the Bank of Ghana revoked the licenses of nine banks, citing insolvency and governance lapses. Poor governance practices such as non-performing loans (NPLs) and insider lending created a culture of risk without accountability, leading to an erosion of trust.
The government’s intervention in the form of a GH₵10.1 billion bailout package from 2017 to 2019 underscored the need for more stringent governance controls.
However, this financial crisis was a symptom of underlying governance failures, a warning signal that now resonates as banks prepare to face climate-related risks.
As Ghana prepares for climate risk regulations, it’s crucial to examine what went wrong and how the sector can avoid repeating these mistakes.
Addressing the Governance Crisis: Global and Local Solutions
The Bank of Ghana has taken an important step by introducing climate-related directives, yet long-term change requires adopting best practices both globally and locally.
1. Global Governance Standards
1.1 Adopt the Task Force on Climate-related Financial Disclosures (TCFD) Standards:
Globally, the TCFD framework, widely adopted by financial institutions, is a blueprint for assessing and disclosing climate-related financial risks. This framework promotes transparency, enabling stakeholders to assess the banks’ climate resilience.
1.2 Sustainability Integration:
Integrating sustainability into core business strategies goes beyond compliance. Ghanaian banks can look to global examples, like Sweden’s Swedbank, which incorporates environmental assessments into its loan decisions. This forward-thinking approach can also appeal to environmentally conscious investors.
1.3 Strengthen Ethical Culture and Leadership:
Many financial scandals stem from cultural issues rather than technical non-compliance. Drawing on successful leadership strategies from institutions like the Bank of England, Ghana’s banks could foster a culture of ethics by embedding integrity in recruitment, compensation, and executive leadership programs.
2. Localized Solutions
Enhance Board Composition with Environmental Experts: Adding climate and environmental experts to the board could help Ghanaian banks navigate the complexities of climate-related risks effectively. Board diversity is essential to tackle climate-related challenges and prepare for a sustainable future.
2.1 Leverage Partnerships for Knowledge Sharing:
Collaborating with local academic institutions, NGOs, and global ESG consultants can bridge knowledge gaps. For instance, partnerships with Ghanaian environmental organizations can guide banks in understanding the country’s unique climate risks.
2.2 Invest in Technology for Scenario Analysis:
With Ghana’s weather and climate data improving, banks could use predictive technology to conduct scenario analyses. Tools like stress testing, commonly used by banks like HSBC and Barclays, can help Ghanaian banks foresee potential climate impacts on their loan portfolios.
3. Public-Private Collaboration for Transparency
3.1 Establish an Independent Governance Review Body:
Forming a body dedicated to monitoring governance could prevent repeat crises. This body could publish annual reviews on the sector’s climate-related governance practices, promoting accountability.
3.2 Incentivize Compliance Through Tax Relief and Grants:
Ghana’s government could offer incentives for compliance with the Bank of Ghana’s directive. Tax benefits or grants for banks that meet or exceed climate-risk governance standards can accelerate the adoption of best practices.
A Wake-Up Call
Data highlights both the risks and the need for strong governance. Ghana has experienced increasing climate impacts, with losses from climate-related events totaling $250 million annually.
For banks, this translates into heightened credit risks, particularly as key sectors like agriculture and energy, highly sensitive to climate impacts, make up a significant share of loan portfolios.
Moreover, while Ghana’s financial sector has become more resilient post-bailout, a focus on governance is imperative to maintain this stability. As of 2023, Ghana’s banking sector recorded a non-performing loan (NPL) ratio of 15%, a significant risk area that the new directive hopes to address by emphasizing climate-sensitive lending practices.
Conclusion
As Ghana’s financial institutions brace for the 2026 and 2027 implementation of the Bank of Ghana’s directive, the importance of good corporate governance becomes increasingly clear. Compliance with the directive requires more than policies on paper; it demands a shift in values, transparency, and a focus on long-term resilience.
Building resilience in Ghana’s banking sector will mean embedding global best practices with local expertise, adopting transparency, and fostering a culture of ethical governance. By taking these steps, Ghana’s banks can better navigate climate-related risks and contribute to sustainable economic growth, setting a precedent for corporate governance that safeguards the sector, and the nation from the unpredictable but inevitable impacts of climate change.
Prof. Samuel Lartey
sammylaatey@yahoo.com
