Climate risk is now credit risk: What Nigerian banks must do before 2028

Nigeria’s move to mandatory IFRS sustainability reporting from 2028 is often framed as a compliance exercise. For banks, however, it is far more consequential: it demands a fundamental rethink of credit risk, portfolio resilience and capital allocation.

For many Nigerian banks, sustainability reporting is still regarded as a specialist discipline—important and visible, but not yet central to the core business of lending, risk selection and balance-sheet management.

That mindset is becoming increasingly untenable. Nigeria’s adoption of the IFRS Sustainability Disclosure Standards—particularly IFRS S1 and IFRS S2—signals a much deeper shift. What is often presented as a disclosure reform is, for banks, the beginning of a credit reform. Institutions that recognise this early will be better positioned not only to comply, but also to price risk more intelligently, allocate capital more effectively, and articulate their strategy more credibly to investors, regulators and Boards.

The regulatory direction is already unmistakable. Nigeria’s amended roadmap provides for a phased transition, with a voluntary adoption period running through 2027 and mandatory adoption for Public
Interest Entities from accounting periods beginning on or after 1 January 2028. The same framework makes clear that sustainability disclosures are expected to be investor-focused and integrated into mainstream reporting. The 2026 Sustainability Reporting Guideline (SRG1) goes further: it requires the sustainability report to be an identifiable and integral part of the annual report, appropriately positioned and not obscured by immaterial or promotional content. This is not an indication that regulators want more glossy reporting. It is a clear signal that they expect more decision-useful information.

That phrase—decision-useful information—is critical. Under IFRS S1 and S2, the question is whether sustainability-related risks and opportunities could reasonably be expected to affect an entity’s cash flows, access to finance, or cost of capital. For banks, this immediately moves the climate discussion out of the narrow space of operational footprint and places it where it belongs: within the loan book, the investment book, and the risk appetite framework. It means asking whether a borrower’s cash flows are vulnerable to flooding, heat stress, carbon costs, technological disruption or regulatory tightening. It means asking whether collateral may become less reliable, whether sector exposures remain aligned with
risk appetite, and whether concentrations that once appeared acceptable may become structurally weaker over time.

This is why the most material climate number for banks is often not Scope 1 or Scope 2 emissions from office operations, but Scope 3 financed emissions—the emissions associated with what the bank lends to and invests in. The Nigerian SRG1 Guideline is explicit on this point: where an entity’s activities include commercial banking, asset management or insurance, it is expected to provide additional information on Category 15 greenhouse gas emissions, or financed emissions. The amended roadmap also
identifies PCAF as a relevant methodology for measuring and reporting financed emissions in financial institutions. In simple terms, the market is being told that banks must learn to measure not only what they emit, but also what they enable.

This has strategic implications. Once financed emissions enter the mainstream, the climate conversation becomes inseparable from portfolio construction. A bank with significant concentrations in emissions- intensive sectors, or in sectors vulnerable to abrupt policy shifts, may face a materially different risk profile from one with a more diversified or transition-ready book. Likewise, a bank exposed to assets in geographies vulnerable to flooding or coastal degradation may need to revisit assumptions on collateral,
tenor and recovery prospects. These are not abstract future concerns. They are already evident in global experience. Morningstar Sustainalytics notes that physical climate risks can damage assets, disrupt operations, and increase repair and insurance costs, while transition risks can create financial, reputational and litigation consequences as policy, technology and consumer expectations evolve. In sectors heavily financed by banks, those effects can quickly move from narrative to credit deterioration.
One reason this is easy to underestimate is that climate risk often enters through familiar channels, albeit under unfamiliar labels. Physical risks affect asset quality, business continuity and insurability.

Transition risks affect business models, margins, capital expenditure needs and long-term competitiveness. In a bank’s language, these risks ultimately flow into the probability of default, loss given default, expected credit loss overlays, collateral valuation, sector limits and pricing discipline. Viewed this way, climate disclosure is not a separate strand of reporting. It is an extension of prudential thinking. Institutions that fail to connect these dots will find themselves reporting numbers they do not yet know how to use.

There is another reason Boards should pay close attention: expectations for data quality and assurance are rising. Nigeria’s roadmap requires entities to undergo a readiness assessment before publishing their first sustainability report. The documentation required is extensive and revealing: a Board resolution approving adoption, a gap analysis, an implementation plan, evidence of governance structures, a materiality assessment, scenario-analysis models, Board-approved metrics and targets, and internal control over sustainability reporting. SRG1 is careful to distinguish this from internal control over financial reporting. The point is not merely semantic. Sustainability information will increasingly need to be governed with the same seriousness as financial information through clear ownership, documented methodologies, validation checks, reviewed assumptions, and retained audit trails.

That requirement should reshape how management teams organise themselves over the next two years. A sustainability team cannot carry this responsibility on its own. The CFO, CRO, Chief Credit Officer, Head of Internal Audit and Board Risk Committee all need to be actively engaged. If the credit approval template does not ask climate-sensitive questions in relevant sectors, then the bank is not yet integrating climate into risk management. If the Board dashboard does not include a view of sector exposures, financed-emissions coverage, data quality, and emerging transition or physical risk hotspots, then governance is not yet fit for what 2028 will demand. The roadmap’s architecture—governance, strategy, risk management, and metrics and targets—offers a ready-made structure for banks to redesign these conversations.

Scenario analysis is another area where banks must move quickly from awareness to application. The roadmap expects entities to disclose the approach used to assess climate resilience and recognises that firms may begin with qualitative approaches before progressing to more quantitative methods. That flexibility is sensible. But it should not be interpreted as permission to postpone difficult thinking. For a bank, scenario analysis should help answer practical questions: What happens to portfolio quality under a
disorderly transition? Which sectors become vulnerable under a steeper carbon-cost regime? What physical hazard assumptions would materially alter collateral values or borrower resilience? If scenario analysis is treated only as a disclosure exercise, the bank misses its real value—as a strategic tool for risk appetite and capital planning.

The most dangerous response for banks at this stage would be to wait for perfect data. That standard does not exist. Even globally, emissions reporting remains patchy, particularly for Scope 3. Sustainalytics points out that a large proportion of corporate emissions data—especially Scope 3—remains unreported, making estimation and comparability difficult. But incomplete data is not an excuse for inaction. It is a reason to begin with transparent methodologies, define coverage, grade data quality, and improve
iteratively. Investors and regulators are likely to be more forgiving of honest estimation with clear caveats than of silence dressed up as prudence.

The broader point is that the market is moving toward a world in which banks will be judged not simply on whether they can disclose climate information, but on whether they can demonstrate that climate information influences credit decisions, portfolio choices and Board oversight. Nigeria’s regulatory reforms are giving institutions a structured runway to prepare for that reality. Banks that use 2026 and 2027 to build governance, controls, financed-emissions measurement, and scenario-informed portfolio
oversight will be doing more than preparing for compliance. They will be strengthening the quality of their risk management and the credibility of their strategic narrative.

By the time mandatory adoption arrives, the most relevant question for Nigerian banks will no longer be whether climate disclosure has become part of annual reporting. That debate is already settled. The more important question will be whether banks have understood what that disclosure is truly about. At its core, it concerns the future quality of earnings, the resilience of asset portfolios, and the discipline of credit judgment. In that sense, climate disclosure is not a reporting sidebar. It is the next chapter in how serious banks think about credit.