Sustainability In The Nigerian Financial Sector
Nigeria’s banking sector plays a significant role in the country’s growth and is critical to the overall development of the economy. Sustainability was initially approached by the sector from a primarily corporate social responsibility (CSR) angle, with financial institutions supporting charitable initiatives and community engagement activities. However, following numerous significant global events such as the 2016 Paris Climate accord, Annual UN Climate Change Summits, and many international financial institutions resorting to green financing, sustainable investing has finally elbowed its way into mainstream financial intermediation.
With these new economic realities and growing complexities of the operating environment, the Nigerian banking sector has over the years begun to pay closer attention to environmental and social sustainability of the companies it finances. In line with global trends, Nigerian banks have developed a sector-wide framework on sustainable banking, namely the Nigerian Sustainable Banking Principles (NSBP).
Nigeria is the largest financial market in Africa. As of November 2018, 21 commercial banks were licenced by the Central Bank of Nigeria (CBN). Nigeria has a relatively well-developed banking sector by regional standards, with regionally high level of banking penetration (44.2% vs. regional average of 17.8% for West Africa) and robust use of advanced financial instruments in the local economy. The country is also well connected to international financial markets and following the 2016-17 oil crisis, the country has seen an increasing influx of foreign capital over the past 12-18 months – capital importation in Nigeria jumped to US$6.3 bln in Q1-18 (594% yoy growth) vs. $12.3 bln for full year 2017 and $5.1 bln in 2016). However, the country is weighed down by high lending rates, which limits access to credit for smaller firms, particularly in the non-oil economy.
Nigeria’s banking sector has recovered strongly from a combination of weak governance and the effects of the global recession in 2009. Though contending with multiple challenges including macro-economic uncertainties, cyber risk, increased competition from alternative banking channels, increased regulations, and a restive customer base demanding effective and flexible banking services, the outlook for the industry is positive.
In 2011, the Nigerian banking sector commenced discussions on adopting a sustainable banking framework, which culminated in the establishment and adoption of the Nigerian Sustainable Banking Principles (NSBP), a set of nine guiding principles and three sector guidelines tailored to the Nigerian operating environment, and presenting a best practice framework for integrating environmental and social considerations into business activities and operations of financial institutions.
Background on the Nigerian Sustainable Banking Principles
The start of conversations on sustainable banking in Nigeria began in 2011 with the convening of the industry at a Sustainable Finance week, organized by the United Nation Environment Program Finance Initiative (UNEP FI). They apply to all lending instruments, project and structured commodity finance, equity and debt capital market activities, retail banking and advisory services.
The first major milestone was the Joint Commitment Statement, which was issued by the Bankers’ Committee in October 2011 stating the sector’s commitment to sustainability and the development and implementation of the principles. The statement was signed by all commercial bank chief executive officers (CEOs), the then Central Bank of Nigeria (CBN) Governor and CEOs of major discount houses.
The Strategic Sustainability Working Group (SSWG) was established under the Bankers’ Sub-Committee on Economic Development and Sustainability to coordinate the process. The SSWG consists of representatives from six banks – Access Bank, Zenith Bank, Standard Chartered, Diamond Bank, Citibank and GT Bank; representatives from the IFC, FMO, CBN, National Deposit Insurance Corporation (NDIC); and an independent adviser.
In addition to the development of an overarching set of Sustainable Banking Principles to be applied to all sectors, the SSWG was also tasked with developing specific guidelines for three strategic sectors:
- Agriculture – to ensure integration of sustainability aspects in the Nigeria Incentive Based Risk Sharing System for Agricultural Lending (NIRSAL) framework. NIRSAL is a joint response by the CBN, the Banker’s Committee and the Federal Ministry of Agriculture and Rural Development to address the challenge of low levels of lending to and investment in the agricultural sector
- Power and Renewable Energy – with the intention of encouraging private sector participation in the financing of renewable energy
- Oil & Gas – in recognition of the significant environmental and social impacts associated with the sector
The Nigerian Sustainability Banking Principles, in conjunction with the CBN circular, provides the framework for banks to include the consideration of environmental and social risks in their lending and investment activities and to implement this through their operational and enterprise risk management and other governance frameworks. Furthermore, the CBN intends to establish reporting requirements to enable the regulator to track progress of implementation of and adherence to the Principles.
Timeline on Nigerian Sustainable Banking Principles development
Following the adoption of the Principles, the Central Bank of Nigeria (CBN) developed a draft reporting template for banks to report on their compliance with the principles. The template presented a way of ensuring uniformity in reporting across the sector. The template was disseminated to the sector in May 2013 for comments and feedback. Following this, feedback was incorporated and a finalized reporting template was issued to the sector in March 2014.
The reporting requirements are grouped in two phases – Phase 1 delivers the Year 1 Milestones (also called the ‘one-off reports’). Phase 2 reporting delivers Year 2 and onward reporting for the banks.
In summary, Phase 1 – ‘Year 1 Milestones’ submissions include:
- A Sustainable Banking Commitment statement articulating a five-year timeline and procedures for integrating the Principles into the Bank’s Enterprise management framework
- An engagement strategy for the bank’s senior management and board of directors, and a capacity building program for relevant stakeholders
- A specialized unit responsible for implementing and reporting on the Principles
- A board approved environmental and social management policy and procedures for banks business activities and operations highlighting details of scope and processes
In summary, Phase 2 – ‘Year 2 and onward’ submissions include:
- A detailed report on the implemented environmental and social policies and procedures
- Delivery against specified targets and milestones
- List of trained business units against the principles
In addition to these reports, the CBN requires the banks to submit:
- Regular reports to management and relevant board committees on its sustainable banking activities
- Standalone annual sustainability/corporate social responsibility report or inclusion of sustainability section in integrated annual report
Phase 1 reporting was collected between March 2014 and January 2015. Phase 2 reporting is expected on an annual basis. Reporting is expected to be submitted through the CBN’s online Electronic and Financial Analysis and Surveillance System (eFASS).
Supervision of the principles are the responsibility of the CBN’s Banking Supervision Department.
Reporting on the Nigerian Sustainable Banking Principles
Joint Statement of Commitment by Members of the Bankers Committee
“The Nigerian Sustainable Banking Principles”
As leaders in the Nigerian financial sector, we are uniquely positioned to further economic growth and development in Nigeria through our regulatory, lending and investment activities across a diversity of segments and sectors of the Nigerian economy. The context in which we make business decisions is, however, characterized by complex and growing challenges relating to population growth, urban migration, poverty, destruction of biodiversity and ecosystems, pressure on food sources, prices and security, lack of energy and infrastructure and potential climate change legislation from our trade partners, amongst others.
Increasingly, it has been demonstrated that the development imperative in Nigeria should not only be economically viable, but socially relevant and environmentally responsible. We recognize that we have a role and responsibility to deliver positive development impacts to society whilst protecting the communities and environments in which we operate – for today’s generation as well as for future generations. We believe that such an approach, one of sustainable banking, is consistent with our individual and collective business objectives, and can stimulate further economic growth and opportunity as well as enhance innovation and competitiveness.
Given the above considerations, we are prepared to take steps to ensure that our business decision-making activities take these considerations into account and are, where applicable, consistent with applicable international standards and practices, but with due regard for the Nigerian context and distinct development needs.
Consequently, we hereby state our commitment to developing and launching a voluntary set of Nigerian sustainable banking principles which will include:
- An overarching set of guidelines relating to our: (a) direct impacts on communities and the environment as a result of our own business operations; and
- indirect impacts on communities and the environment as a result of our lending and investment activities;
- A set of sector-specific guidelines, including as a first priority: (a) oil and gas; (b) power (with a focus on renewable energy); and (c) agriculture and related water resource issues;
- A commitment to raising awareness and developing meaningful and lasting local capacity to manage emerging environmental and social risks and opportunities within our internal operations, as well as to relevant financial sector government agencies, learning institutions and service providers.
In developing these sustainable banking principles, we recognize the need for a process which involves the engagement of relevant stakeholders and industry experts. We also recognize the need for an approach which provides for appropriate levels of transparency, accountability and self-assessment through regular reporting to our stakeholders. We will seek to work with the Central Bank of Nigeria, other relevant government agencies and development finance institutions to create the enabling environment as well as the incentives and enforcement mechanisms required for successful adoption and uptake of the sustainable banking principles.
We acknowledge that we can better support environmentally and socially responsible economic development in Nigeria by joining forces rather than standing alone. We hereby sign this Joint Commitment Statement with the aim of developing a set of sustainable banking principles for the Nigerian banking sector, to drive long-term sustainable growth whilst focusing on development priorities, safeguarding the environment and our people, and delivering measurable benefits to society and the real economy.
The Principles in detail
The Nigerian Sustainable Banking Principles include sector specific guidelines for engaging in three sectors considered priorities due to their high-risk natures and the high level of exposure by financial institutions to these sectors in Nigeria.
Scope and Applicability
- Financial products and services in the agriculture value chain
- Nigeria Incentive Based Risk Sharing System (NIRSAL) lending
This Guideline applies to all lending instruments, project and structured commodity finance, equity and debt capital market activities, retail banking and advisory services provided to new and existing clients in the agricultural sector. The extent to which the Principles apply will depend on the level and nature of agriculture sector business activities financed by a Bank. Retroactive application of environmental and social requirements under this Guideline is not required for existing clients. The Guideline and its environmental and social requirements will, however, apply to any additional new facilities or services for existing clients.
Scope and Applicability
- Power generation sources and associated facilities (i.e. oil, gas and hydropower), except nuclear
- Electricity distribution and transmission infrastructure (e.g. upgrades or extensions)
- Alternative sources of power generation and associated facilities (e.g. solar, clean coal, wind, biomass, etc.)
The Guideline applies to all corporate lending, project and structured finance, equity and debt capital market activities, and advisory services provided to new and existing clients in the power sector. The extent to which the Principles apply will depend on the level and nature of power sector business activities financed by banks. Retroactive application of environmental and social requirements under this Guideline is not required for existing clients. The Guideline and its environmental and social requirements will, however, apply to any additional new facilities or services for existing clients.
Scope and Applicability
- Exploration activities – aerial and seismic operations
- Appraisal drilling
- Development and production (including processing and initial storage)
- Decommissioning and rehabilitation
- Product refining
- Transportation and distribution activities – via pipelines, roads (trucks) and sea vessels
- Marketing – including product importation and storage
- Provision of technical support services for the upstream and downstream segments in the areas of drilling, well completion, well simulation, logistics, equipment supplies, etc.
The Guideline applies to all corporate lending, project and structured finance (including structured commodity finance), equity and debt capital market activities, and advisory services provided to new and existing clients in the oil and gas sector. The extent to which the Principles apply will depend on the level and nature of oil and gas sector business activities financed by a bank. Retroactive application of environmental and social requirements under this Guideline is not required for existing clients, however the Guideline and its environmental and social requirements will apply to any additional new facilities or services for existing clients.
The Nigerian Sustainability Banking Principles (NSBPs) require banks to commit to adopting and implementing international environmental and social standards in their Environmental and Social Policy Statements, such as the Equator Principles, IFC Performance Standards and UN Global Compact. The environmental and social policy of banks forms a part of their Environmental and Social Management System (ESMS). An ESMS builds on the policy, with procedures, tools and staff capacity needed to effectively identify and manage banks’ environmental and social risk.
The NSBPs also require banks to include commitments in their Environmental and Social Policy or develop specific standalone policies on the following environmental and social aspects:
- Human Rights, consistent with the United Nations Universal Declaration on Human Rights, the Nigerian Constitution and local laws
- Gender equality and women’s economic empowerment issues
- Financial inclusion, financial literacy and the promotion of consumer protection
- Environmental and social procurement requirements for suppliers, contractors, and other third-party service providers
Banks are also required to develop a sector-specific environmental and social approach and policy for their power, agriculture, oil & gas business activities, due to the high-risk nature of these sectors. Guidance on managing the environmental and social risks associated with these sectors can be found in the NSBPs’ sector specific guidelines.
IFC Performance Standard 1 provides guidance on overarching policy development defining environmental and social objectives and principles. In addition, financial institutions are required to incorporate the Equator Principles into credit and risk management policies.
First for Sustainability: Guidance on developing and implementing environmental and social policy
Principle 9 of the Nigerian Banking Sustainability Principles (NSBP) requires banks to “regularly review and report on – progress in meeting these Principles at the individual institution – level.”
The NSBP Guidance Note requires that reporting to external stakeholders on progress against the Principles and banks’ sustainable banking commitments, policies and procedures be undertaken annually.
Banks should aim to produce sustainability reports on an annual basis as a standalone report, or preferably as an integral part of their annual report to shareholders. The report should meet reporting requirements specified in the Global Reporting Initiative Financial Sector Supplement. Where appropriate, independent third-party reviews and assurance of reports should be undertaken.
Internationally, reporting on sustainability performance is becoming an essential part of a company’s license to operate. Many larger companies are moving towards producing integrated reports, rather than standalone sustainability reports, as they represent a more holistic approach to managing environmental and social aspects as part of a business’s overall performance. In Nigeria, there is a trend towards sustainability and integrated reporting amongst large corporates.
Benefits for banks on producing sustainability reports include becoming more attractive to development and international financial institutions, increased accountability from stakeholders, and improved processes and systems to track and manage environmental and social performance.
The primary regulator of the banking sector is the Central Bank of Nigeria (CBN), reporting to the Federal Ministry of Finance. The CBN Act of 2007 of the Federal Republic of Nigeria charges the bank with the overall control and administration of the monetary and financial sector policies of the Federal Government with the aim of:
- Ensuring monetary and price stability
- Issuing legal tender currency in Nigeria
- Maintaining external reserves to safeguard the international value of the legal tender currency
- Promoting a sound financial system in Nigeria
- Acting as banker and providing economic and financial advice to the Federal Government
To promote a sound financial system, the bank is charged with administering the Banks and Other Financial Institutions (BOFI) Act (1991) as amended, through its supervision and policy regulation activities, as well as the promotion of an efficient payment system. In addition to its core functions, CBN has over the years performed major developmental functions focused on all the key sectors of the Nigerian economy – financial, agricultural and industrial. Overall, these mandates are carried out by the bank through its various departments.
The Banker’s Committee also plays an important coordination role for the sector. The Committee is made up of the chief executive officers of all licensed banks in Nigeria. Its role is to examine and make recommendations on major issues affecting the banking industry; facilitate communication between the banks, sector regulators and the Federal Government; facilitate the development of manpower for the sector; review banking tariffs; make proposals on matters of banking, finance and the national economy; interpret banking policies and laws; resolve misunderstandings and conflicts; and prepare codes of conduct.
In Nigeria, other financial service sector regulators include the National Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), Nigerian Pension Commission (PENCOM) and the Nigerian Insurance Commission (NAICOM), amongst others. The Financial Services Regulation Coordinating Committee (FSRCC) is a statutory committee, set up as an inter-agency body to address issues of common interest and concern to 10 regulatory and supervisory authorities in the financial services industry, including the CBN and agencies listed below.
The National Deposit Insurance Corporation (NDIC) was established by decree in 1988 with the primary role of insuring licensed banks and other deposit taking institutions, thereby providing a source of security to depositors. More specifically, the NDIC provides assistance in the interest of depositors to financially distressed banks and a financial guarantee for depositors. It also has a responsibility to advise financial authorities on policy issues to ensure sound banking practices. The NDIC was also involved in the drafting of the Nigerian Sustainability Banking Principles.
The Securities and Exchange Commission (SEC) is the main regulatory institution for the Nigerian capital market and currently derives its powers from the Investments and Securities Act 29 of 2007. It is supervised by the Federal Ministry of Finance. While the Nigerian Stock Exchange (NSE) is privately-owned and self-regulating, the SEC maintains oversight, with the mandate of ensuring orderly and equitable dealings in securities, and protecting the market against insider trading abuses.
The SEC has published a Code of Corporate Governance for public companies, which is applicable to all corporate entities, either listed on a recognised securities exchange in Nigeria or seeking to raise funds from the capital market. Under the reporting requirements of the Code, companies should disclose their sustainability policies and programmes covering issues such as corruption, community service, environmental protection, HIV/AIDS and other matters of general corporate social responsibility. Corporate boards of directors are primarily responsible for ensuring adherence to the Code.
With the release of the 2011 SEC Consolidated Rules and Regulations (the “Rules”), the establishment, management and operation of Private Equity Funds (PEFs) is now regulated and PEFs operating in Nigeria have to be authorised and registered with the SEC. There are specific rules for PEFs, including a requirement that where there is investment in unlisted securities of a company, the investee company has to demonstrate compliance with SEC’s Code of Corporate Governance.
The Nigerian Pension Commission (PENCOM) is the main body responsible for the regulation, development of guidelines, supervision and ensuring of effective pension administration in the country, and for the issuance of guidelines for the investment of pension funds and establishment of standards, rules and guidelines for the management of pension funds under the Act. Since the pension reform program is governed by the key principles of sustainability, safety and security of pensions, PENCOM applies the Nigerian Sustainable Banking Principles of financial inclusion, collaborative partnerships and environmental and social governance.
The Nigerian National Insurance Commission (NAICOM) is the main body responsible for supervising, regulation and control of the insurance business in Nigeria. NAICOM plays a key role in the successful implementation of Nigeria’s Sustainable Banking Principles through capacity building, sustainable investments and making sure that insurance policies are risk free.