Ghana’s financial institutions are standing at a critical juncture as the Bank of Ghana (BoG) rolls out its groundbreaking Climate-Related Financial Risk Directive.
The initiative aims to integrate climate risks into the core of financial governance and reshape how banks operate in a world increasingly defined by environmental challenges.
This directive demands that all regulated financial institutions (RFIs) adopt robust measures to identify, manage, and mitigate risks posed by climate change. Central Bank has set December 2025 as the deadline for banks to achieve full compliance.
Some experts say this new directive, for many banks, represents both a challenge and an opportunity. Institutions lagging in digitalization, risk analysis, or green financing mechanisms may struggle to comply. On the other hand, forward-thinking banks could leverage the directive to pioneer sustainable finance solutions, gaining a competitive edge in the market.
With the banking sector set for disruption as a result of this new directive, the following are some of the areas in the financial sector that would be reshaped due to the implementation.
Corporate Governance
The board of directors and senior management of RFIs must establish and oversee climate-related financial risk management strategies, ensuring alignment with the institution’s business objectives, strategies, and risk management frameworks. These strategies should assess the impacts of physical and transition climate risks across short, medium, and long-term horizons, integrating material risks into the Risk Appetite Statement (RAS) with quantitative and qualitative targets for monitoring progress.
Clear roles and responsibilities must be defined across the organizational structure, guided by the three lines of defense model, and supported by adequate resources and training for staff.
Internal audit functions should evaluate governance and processes for managing climate-related risks, while senior management must review and update these strategies regularly, reporting progress to the board. The board is responsible for maintaining collective understanding and ensuring ongoing capacity development to address climate-related financial risks effectively.
Internal Control Framework
RFIs must integrate climate-related financial risks into their internal control frameworks, ensuring effective identification, measurement, and mitigation of such risks across the three lines of defense. This includes defining clear responsibilities and reporting lines, equipping staff with adequate knowledge of climate-related risks, and having the Internal Audit Function provide independent reviews of the control framework, governance systems, and data quality. Additionally, RFIs should strengthen their AML/CFT policies to prevent contributing to climate change through illicit financing of environmental crimes like illegal mining, logging, waste disposal, and pollution.
Internal Capital and Liquidity Adequacy
RFIs must identify and, where feasible, quantify material climate-related financial risks over relevant time horizons of at least three years, integrating these risks into their internal capital and liquidity adequacy assessments and stress testing programs. This involves evaluating the potential impact of climate risks on solvency and liquidity buffers under both business-as-usual and stressed conditions, developing key risk indicators and metrics, and progressively enhancing methodologies as data improves.
Where applicable, RFIs should use scenarios developed by the Network for Greening the Financial System (NGFS), supplemented by additional scenarios reflecting local and institution-specific exposures, such as geographical vulnerabilities and sectoral risks. The Internal Capital Adequacy Assessment Process (ICAAP) must provide comprehensive insights into climate risk exposures, including methodologies, assumptions, human judgments, data proxies, and stress testing details, to ensure robust capital adequacy planning.
Risk Management Process
RFIs must establish robust processes for identifying, measuring, monitoring, and managing material climate-related financial risks over appropriate time horizons, integrating these risks into their Risk Appetite Statement (RAS) and Enterprise Risk Management (ERM) frameworks. These risks include exposures to specific industries, sectors, and geographic locations. To manage these risks effectively, RFIs should implement frameworks for collecting accurate and reliable data on physical and transition risks, addressing data gaps with alternative sources or proxies as needed. They must utilize tools and models, including climate scenario analyses, with a clear understanding of their methodologies, assumptions, and limitations.
RFIs are required to set specific risk limits and KPIs aligned with their risk appetite, embed climate risk considerations within governance structures and operational processes, and adjust business strategies accordingly. Additionally, they must evaluate stress testing approaches, incorporate climate risks into scenarios, engage counterparties to assess and monitor their climate exposure strategies and establish mitigation frameworks. RFIs should adopt a comprehensive climate-related financial risk management policy detailing roles, responsibilities, processes, and reporting structures across all levels of the organization.
Management Monitoring and Reporting
RFIs must establish internal risk reporting systems and frameworks to monitor material climate-related financial risks and provide timely information for effective decision-making by the board and senior management. These frameworks should ensure accurate and reliable data collection through robust data governance, IT infrastructure, and internal processes. RFIs are required to actively engage clients and counterparties to gather data on their transition strategies and risk profiles.
Additionally, RFIs must develop risk indicators to categorize exposures based on climate-related risks and create metrics, limits, or indicators to assess, monitor, and report these risks at various levels, such as exposure, counterparty, or portfolio. Internal reporting systems should produce reliable, timely, and accurate information on climate-related risks, including risk concentrations across geographies, sectors, products, or counterparties, to support strategic planning and enhance risk management effectiveness.
Comprehensive Management of Climate-Related Financial Risk
RFIs must integrate climate-related financial risks into their risk management systems and processes to address impacts on credit, market, liquidity, operational, and other risk profiles. They are required to establish credit policies that incorporate climate-related risks throughout the credit lifecycle, including client due diligence and ongoing monitoring. RFIs should also identify and manage concentration risks tied to geographical and sectoral exposures with heightened climate-related risks.
Climate-related impacts on portfolio valuations and liquidity profiles must be assessed, including through stress testing, and incorporated into risk management frameworks. Additionally, RFIs must evaluate operational, strategic, reputational, regulatory, and litigation risks arising from climate-related factors and ensure their systems account for these risks where material. This includes assessing the potential impact on their ability to deliver critical services and integrating these considerations into business continuity and strategic planning processes.
Scenario Analysis
RFIs should employ scenario analysis to evaluate the resilience and vulnerabilities of their business models and strategies against various plausible climate-related pathways. This analysis should address both physical and transition risks and their impacts on credit, market, operational, and liquidity risks across short, medium, and long-term horizons.
Where data and methodology challenges exist, qualitative approaches can serve as a minimum standard. Scenario analysis should assess the effects of climate change and transitions to low-carbon economies on business strategies, measure vulnerabilities, estimate potential losses, and identify limitations in data and methods. It should inform the adequacy of risk management frameworks, incorporate relevant physical and transition risks, and reflect cumulative and feedback effects, such as interdependencies, geographical and sectoral risks, indirect exposures, and risk transfers. This approach aligns with strategic planning horizons and enhances understanding of climate-related risks and their financial implications.
The Bank of Ghana’s directive goes beyond being a mere regulatory update—it’s a clarion call for the financial sector to embrace innovation and adapt to the realities of climate change. The directive emphasizes that building climate resilience is no longer optional; it is a critical requirement for the survival and stability of financial systems in a rapidly evolving global environment.
But the question still remains, will your bank take proactive steps to meet this challenge, or risk falling behind as the financial landscape shifts? Time is of the essence, and the path forward demands decisive action.
