South African banks may need to take climate and litigation risk into account

August 29, 2023|Written by Moriah Costa|South African Reserve Bank

South African banks and insurers may need to rethink how they handle climate risks and climate change in their frameworks, including litigation risks.

In early August the Prudential Authority (PA), the supervisory arm of the South African Reserve Bank (Sarb), released long-awaited draft guidance for banks and insurers on integrating climate risks into their governance and risk-management frameworks.

“Climate change may result in physical and transition risks that could affect the safety and soundness of individual banks, and have broader financial stability implications for the banking system,” the PA said in its notice. The central bank told banks last year to step up their resilience to climate change risks.

The four draft guidance notices deal with climate-related risk practices and disclosures for both banks and insurers. Under the proposed guidelines, financial institutions will need to make sure that internal compliance departments and boards have clearly identified processes to assess climate-related risks. They will also need to provide evidence of their oversight of these risks. The board should also be aware of any direct legal action taken against the bank “for failing to manage climate-related risks”.

The guidance builds on the ISSB climate disclosure standards, requiring climate change risks to be incorporated into banks’ annual financial planning and risk management frameworks. Compliance teams should also take into account legal risks arising from climate change. The proposed guidelines also suggest that banks should consider undertaking transition planning, and take into account geopolitics.

The draft guidelines are open for consultation until 13 September.

Sarb had not yet implemented mandatory climate change disclosures or conducted climate stress tests. South Africa received a D- on the Green Central Banking scorecard, mostly due to the country’s low score in monetary and financial policy, and in leading by example.

This page was last updated August 29, 2023

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