For Ethiopia’s banks and their emerging market peers, now is a critical moment to embrace ESG -not to mimic the West, but to carve a context-specific path that leverages ESG as a strategic advantage.
While Environmental, Social, and Governance (ESG) principles have become deeply embedded in the business ecosystems of developed economies, its adoption in Ethiopia is still in its infancy. In the Ethiopian banking sector, ESG is gradually emerging as a framework for sustainable growth, albeit with unique challenges and opportunities.
The country’s banking sector is in the midst of change, driven by economic reforms, digital innovation, and gradual integration with global markets. Yet, ESG is still largely interpreted through the lens of traditional corporate social responsibility (CSR), with a focus on community development initiatives, environmental awareness efforts, and modest governance improvements.
For instance, some banks have initiated tree-planting campaigns, supported education programs, and implemented measures to enhance transparency and accountability. However, formal integration of ESG into core banking strategies remains limited. Key barriers include a general lack of awareness, scarce resources, and limited regulatory pressure.
By contrast, the trajectory of ESG in more mature markets presents an interesting divergence. In the United States, ESG has recently become a polarizing concept, with critics questioning whether it prioritizes ideological values over shareholder returns. As a result, some institutions are moving away from the term “ESG” entirely, preferring phrases like “sustainability” or “responsible investing” to avoid controversy. Meanwhile, in Europe, ESG remains a critical part of corporate strategy.
Still, the region faces its own challenges. Regulatory requirements, such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR), have placed significant pressure on companies to disclose their ESG performance. However, the complexity of these regulations, coupled with concerns about greenwashing, has made ESG implementation increasingly problematic. Some European banks are now grappling with the costs and complexities of compliance, leading to a more cautious approach.
For Ethiopia’s banks and their emerging market peers, now is a critical moment to embrace ESG -not to mimic the West, but to carve a context-specific path that leverages ESG as a strategic advantage. There are several compelling reasons why early adoption makes sense. First, global investors are increasingly prioritizing ESG-compliant businesses. By integrating ESG principles, Ethiopian banks can position themselves as attractive partners for international investors seeking sustainable opportunities. This is particularly important as Ethiopia continues to open its economy to foreign investment.
Additionally, regulatory momentum is building. The National Bank of Ethiopia (NBE)’s Corporate Governance Directive SBB 91/2024 is a pivotal development. It mandates banks to establish prudent and effective corporate governance in banks, foster sound management, accountability, and balance risk-taking while protecting stakeholder interests. Its goal is to maintain the stability and integrity of Ethiopia’s financial system.
It also explicitly promotes sustainable banking, requiring banks to adopt green financing practices and ensure that at least one-third of board members are women, with another third serving as independents. Banks are further required to publish sustainability disclosure reports- failing which they face penalties. This directive signals a shift from voluntary ESG adoption to regulatory enforcement.
Reinforcing this shift is a new sustainability guideline issued by the Ethiopian Bankers Association (EBA) in partnership with the International Finance Corporation (IFC) in November 2024. This guideline aims to help local banks comprehend how to incorporate sustainability and ESG (Environmental, Social, and Governance) principles into their business operations and includes a five-round IFC training program for institutions committed to ESG implementation. While ESG regulations are limited in Ethiopia today, global trends suggest that stricter requirements are on the horizon. Proactively adopting ESG principles allows banks to stay ahead of regulatory changes and avoid costly compliance challenges in the future.
Adding to the momentum, the launch of the Ethiopian Securities Exchange (ESX) in January 2025 marks a new chapter in capital market development. Wegagen Bank S.C. was the first to list, and the exchange mandates ESG disclosures for all listed companies. These requirements ensure that both financial and non-financial information is communicated transparently to investors and the public. Given the significant interest from local banks in joining this newly established exchange, issuing a sustainability disclosure report has become a mandatory step for compliance and fostering investor confidence.
Beyond regulation and investment, ESG can strengthen brand equity. Consumers and businesses are increasingly drawn to organizations that demonstrate a commitment to sustainability. By embracing ESG, Ethiopia’s banks can build trust and loyalty among their stakeholders, strengthening their market position.
While the path to ESG maturity will not be without challenges, it also presents significant opportunities. By learning from the experiences of their counterparts in the US and Europe, Ethiopian banks can avoid common pitfalls and develop ESG strategies that are tailored to their unique contexts. I have observed that various stakeholders in Ethiopia, beyond just banks, are working on sustainability initiatives independently. To foster greater impact, banks should organize stakeholder engagement sessions to explore opportunities for collaboration on sustainability issues, including green financing.
By partnering with government agencies, international organizations, and local communities, banks can leverage valuable support, resources, and expertise to advance their ESG initiatives effectively. Such partnerships can enhance collective efforts toward achieving the Sustainable Development Goals (SDGs).
Haile Mekonnen Birhanu is the Division Manager, ESG (Environmental, Social and Governance) /Sustainability, at Wegagen Bank s.c, Ethiopia