How Sarb and SA's banks are wiring the country's green finance grid
How do you price the risk of a dying planet? The South African Reserve Bank and the country's financial institutions are mapping out a new financial grid for an economy hit by climate extremes.
At what point does climate risk become financial risk? And how does a central bank protect the economy when the shocks are fiscal as well as physical?
During a recent talk at Stellenbosch University, South African Reserve Bank (Sarb) deputy governor Fundi Tshazibana clarified the central bank's role.
'We are not the drivers of climate policy in the country, we are not the drivers of environmental policy in the country,' she said. 'Where we are focused as central banks is to say there are risks that are associated with climate change, there are risks that are related to extreme weather events, there are risks related to deterioration in nature.'
Sarb doesn't set carbon targets, but it does police the intersections between financial stability and ecological collapse.
The mercury is rising. South Africa's inflation could spike by 15 percentage points if climate shocks continue, said Tshazibana. Droughts are intensifying and floods are more frequent. In 2022, Sanlam estimated its risk exposure to the floods in KwaZulu-Natal at around R4-billion. And that was just one insurer. The KZN government estimated economic losses in the province amounting, overall, to about R17-billion.
Tshazibana noted that when the Sarb asked banks how much of their credit risk exposure lay with companies vulnerable to climate-related events, the answers ranged from 30% to 60%.
Inside Sarb's climate risk arsenal
In response to the financial risks climate change poses, Sarb has beefed up its toolkit:
Bi-monthly inflation reviews now take climate shocks, such as food price spikes due to droughts, into account.
Advanced modelling using dynamic and general equilibrium frameworks with granular data, aims to capture the multidimensional impact of climate change.
Climate stress-testing: Banks completed Sarb's first round of scenario tests in 2024, and insurers are next.
Guidance to financial institutions: Tshazibana urged financial institutions to 'go talk to your clients and start collecting that information so that you yourself can understand the risk exposure'.
Greening Sarb's operations: Sarb has developed a strategy to reduce its carbon footprint by 30% by 2026 and reach net zero by 2035.
Treasury's call to mobilise sustainable capital
Deputy Minister of Finance, David Masondo, told the SA Financial Competitiveness Lekgotla that economic growth stagnated at around 0.6% in 2024, with infrastructure limiting transformation.
Masondo affirmed the department's commitment to 'mobilise capital for investment and enhance the competitiveness of South Africa's financial markets'.
The Treasury is working with global financial networks and development institutions to mobilise blended finance for adaptation, ensuring capital flows into climate-resilient infrastructure, Masondo said.
How does this affect you?
Food prices could increase. Climate shocks like floods and droughts disrupt farming, which means your grocery bill could spike.
Jobs are on the line. As banks adjust their lending strategies to favour low-carbon sectors, carbon-heavy industries may miss out on financing.
Your bank is watching your carbon footprint. Financial institutions are beginning to factor climate risk into loan and credit decisions.
Pensions and savings are exposed. If insurers buckle or banks miscalculate the risks of the effects of climate change, your savings could be expected to carry the cost.
Banks get down to green business
Banks such as Standard Bank are on the frontlines of implementing green financing strategies – trying to turn sustainability into a return on investment.
The bank recently launched a Sustainable Finance Product Framework, mapping out how green, social, and transition-labelled debt instruments will be structured and tracked.
'Green categories like climate adaptation or resilience funding or funding for nature-based projects may require greater use of innovative blended finance structures… regulatory incentives that enable green funding are required,' said Boitumelo Sethlatswe, Standard Bank's head of sustainability.
Sethlatswe said that South African banks were investing in analytical tools and building internal models using client and open-source data to assess climate risks, but noted that inconsistent data and long-term modelling were a problem for Africa.
The system is catching up
While Sarb stress-tests the system, Absa says the entire financial sector is making strides.
'South Africa's financial institutions, including Absa, are taking significant steps to improve the way we identify, assess and manage climate-related financial risks,' a spokesperson said.
Absa points to growing alignment with global frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) and said that internal risk governance was catching up.
But in a country with sky-high unemployment rates, the climate conversation should take social realities into consideration. 'The South African Reserve Bank and other monetary authorities play a critical role in facilitating a just transition,' Absa said. 'In a high-unemployment country, it is essential to strike a balance between climate goals and inclusive growth.
Absa believes that regulators are increasingly asking the right questions. 'The supervisory focus on climate exposure and transition risk is helping to elevate climate risk management within financial institutions,' the bank said.
Nedbank prepares for more demanding disclosures
Nedbank, which published its first TCFD report in 2021, says the sector is already preparing for more stringent mandatory disclosures.
'We submitted stress tests last year to the Sarb in line with the rest of the banking sector,' said Priya Naidoo, Nedbank's executive for strategy. 'We maintain a focus on ensuring that we are ready for the enhanced disclosures.'
The bank has also introduced a Climate Risk Materiality Framework, aligning its lending decisions with guidance from Sarb, the Basel Committee, and international bodies such as the Intergovernmental Panel on Climate Change and the Network for Greening the Financial System.
A strong focus for Nedbank is on integrating climate risks into all major risk types, including credit, market, operational, and funding risk. 'Credit risk management is in place to incorporate and monitor progress toward the bank's strategic climate-related objectives of reducing exposure to all fossil fuels by 2045,' said Naidoo.
This includes tracking exposure across sectors and implementing transition 'glidepaths' to gradually reduce carbon-intensive assets, she said.
Nedbank also flags that the success of climate-aligned finance depends on cross-functional collaboration across business, finance, risk and sustainability teams. Climate resilience is now a core strategic pillar as consumer and investor expectations evolve. DM
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Herald
an hour ago
- The Herald
Godongwana declares contentious Budget the new normal as parly adopts fiscal framework
While finance minister Enoch Godongwana did not run this past weekend's Comrades marathon, his 2025 Budget finally reached the last mile of its race for adoption, after three lockups, two tablings and a court challenge. The National Assembly voted to adopt the 2025 fiscal framework and revenue proposals as well as the committee report thereof on Wednesday afternoon, with 268 voting in favour of the adoption, 88 voting against the adoption, and two abstentions. Godongwana told the National Assembly sitting that he suspected that over the next four years, the management of the Budget as well as the fiscal framework would be similar to how it was handled this year. 'We have had a painful journey to arrive at this date, where the fiscal framework is being approved. It has been a very painful journey. Definitely, from the Treasury perspective, we've drawn a number of lessons, but I suspect, also members of this house, must draw a number of lessons as to how, in practice, are we going to manage the debates around the fiscal framework moving forward?' Parliament's February sitting to table the Budget was postponed over resistance at a cabinet level to a VAT hike proposal. Godongwana returned to parliament in March with a revised VAT hike proposal, and the fiscal framework was challenged in court. He finally tabled a Budget in May with a fuel levy hike in place of the scrapped VAT hike. He challenged the assertion that his 2025 Budget was an austerity budget. 'This budget is not austerity. We are increasing taxes, not to focus on debt, but to focus on funding social services. Education, health and so on.' ANC MP and standing committee on finance chair Joe Maswanganyi moved for the adoption of the fiscal framework and revenue proposals report, saying that processing a budget within a coalition government can be complex due to the competing interests involved. In Godongwana's defence, Maswanganyi said anyone calling for Godongwana's head was out of tune with the realities facing coalition governments around the world. 'Considering these realities, particularly the tariffs and trade tensions initiated by the US , it is prudent to pay attention to the five-year plan ... This is not an austerity budget. The Budget has garnered praise for being pro-poor and pro-growth.' He said stakeholders welcomed the scrapping of the proposed VAT hike ahead of its effective day of May 1, but raised concerns over the financial impact of the fuel levy hike on business as well as middle-to-low-income households around the country. MK Party MP and former finance minister Des van Rooyen said his party rejected the committee's report on the 2025 budget as a 'sell-out pact' led by the parties that came together to form the government of national unity after last year's election. 'It is in this report that the ANC, DA, IFP, FF Plus, Action SA, and other GNU beneficiaries agreed that the majority of our people should be subjected to the fuel levy hikes and personal income tax. Think-tanks are in agreement that the fuel levy is the most regressive tax: even worse than VAT.' South Africans will pay more for work, school and travel expenses, and the buying power of people's income will be whittled away due to bracket creep. He said the report sought to protect the interests of a wealthy few. DA MP Wendy Alexander said for the first time in years, the budget process included ordinary South Africans rather than being rubber-stamped by a legislature where the ANC enjoyed a strong majority. She called the scrapping of the VAT hike a victory for democracy and South Africans. 'When citizens watch, comment and engage the budget process, the democracy grows, and this is precisely what the constitution envisioned — a government accountable to the people and not the other way around.' She said the GNU must prove that government can function across spheres when the stakes demand it. She said the projected 77% debt-to-GDP ratio was unsustainable and that the country could not be expected to build more schools and hospitals on the back of untenable debt levels. EFF MP Omphile Maotwe said her party rejected the fiscal framework and revenue proposal report as a project which would condemn South Africans to considerable tax burdens, courtesy of the 'former liberation movement', the ANC. 'It took the EFF to approach the Western Cape High Court to stop the VAT increase. If it were not for the EFF South Africans would already be paying 15.5% VAT today. The people of South Africa know now without any doubt that the EFF is the only dependable tool in the hands of the poor and the working class.' She said the fuel levy increase was an attack on motorists, the poor and the working class, who were already facing rising costs before the proposal was tabled. IFP MP Nhlanhla Hadebe said his party accepted the report. Supporting the report, Patriotic Alliance MP Ashley Sauls said the 2025 budget process tested the GNU's resolve as the government remained intact through an ordeal that has collapsed coalition governments elsewhere in the world. Freedom Front Plus MP Wouter Wessels pointed out that MPs calling for a wealth tax were calling for a deeper tax on themselves and their steep salaries. He said a credible budget was one where every rand and cent was channelled towards the benefit of ordinary South Africans. Action SA Alan Beasley said his party was among the first to oppose the proposed VAT hike, saying it was immoral to ask the poor to pay more for essentials while corruption goes unchecked. 'We welcome the minister's decision to scrap the VAT increase and are proud of the role we played in securing this outcome. We also welcome the R7.5bn n allocated to Sars over the medium term, an investment ActionSA championed.' He said that while Action SA rejected the R22bn raised through regressive taxes like fuel levy hikes and bracket creep, strengthening Sars is essential. 'Properly funded, Sars can close the tax gap, tackle illicit trade and boost revenue collection by a conservative R50bn annually. We are encouraged that the minister has committed to monitoring Sars's performance and will provide tax relief in next year's budget if revenue exceeds targets.' ACDP MP Steve Swart said the National Treasury should produce the fuel levy review that was promised to the legislature. He said while the ACDP believed in miracles, it appeared to be a remote possibility that South Africa's GDP would grow well beyond 2% in the coming years. UDM MP Nqabayomzi Kwankwa said the fuel levy was worse than VAT as there was no way of mitigating its regressive impact on low-income households, and anyone who considered the scrapping of VAT a victory for these households was being 'hypocritical'. Supporting the report, RISE Mzansi MP Songezo Zibi said the national balance sheet remained unsustainable as over 80% of the revenue collected by the SA Revenue Service (Sars) pays for over R820bn in salaries, R420bn in debt service costs and R440bn a year to the social security package. 'That leaves very little money to invest in the things we need to unlock economic growth and create sustainable jobs. [Dated] national and local infrastructure continues to choke our economy, together with policy assumptions that still assume we live in the 1960s.' BOSA MP Mmusi Maimane said one of the grimmest realities in the Budget's fiscal framework was that the rate of investment remained low, leaving the government with little funding for its spending programmes. 'I fear it is a missed opportunity for us to really speak about reform. The question we should be obsessed about is not just GDP growth or actually looking at debt. It should be the rate of investment in this country. And on the same budget, it proposes that our rate of investment is at 4.2%.' TimesLIVE
The Citizen
3 hours ago
- The Citizen
E-toll debt bites into traffic light repair budget
The DA has raised serious concerns about an imminent budget shortfall that will see Gauteng's provincial traffic light maintenance grind to a halt before the end of July. This looming crisis threatens the safety and mobility of millions of road users across the province, including key urban areas such as Pretoria. 'This will affect the whole of the province,' warned Evert du Plessis, DA Gauteng spokesperson for Roads and Transport. 'There are traffic lights that belong to and are maintained by the province in every metro and municipality. Pretoria will definitely be affected as well.' The budget shortfall was revealed during a recent Gauteng Provincial Legislature (GPL) Transport, Roads, and Logistics Committee meeting. Committee members were told that the allocated funds will be exhausted before the end of July, just three months into the financial year. In Pretoria, provincial roads, designated by the letter 'R', crisscross the city and act as vital connectors between suburbs and national routes. These include major corridors like the R55 and connecting streets, where intersections often depend on traffic signals to regulate the complex flow of daily commuters. The problem is exacerbated by the fact that provincial roads often intersect with national (Sanral) and municipal roads, creating shared responsibilities between all three spheres of government. 'We don't have a specific list for dysfunctional traffic lights on Tshwane's provincial roads as it changes on a daily basis,' explained Du Plessis. 'There are, however, a substantial number of provincial and national roads that cross metro boundaries. So all three tiers of government must take responsibility for their own infrastructure.' However, without a functional maintenance budget, Gauteng's provincial authorities will soon no longer be able to service their share of these intersections. Du Plessis said this shortfall is more than just an administrative hiccup. 'Non-functioning traffic lights pose a real threat to public safety, placing motorists and pedestrians at risk of collisions, violent crime at intersections, and delays that disrupt the daily routines of workers, parents, and emergency services. 'For the remaining nine months of the year, motorists could be stuck in gridlock, relying on pointsmen instead of functioning systems to reach their destinations,' he said. The DA has linked the budget collapse to Gauteng Premier Panyaza Lesufi's decision to commit provincial funds to paying off e-toll debt, an obligation the province was never legally bound to. Lesufi said on March 18 that the Gauteng government will absorb the e-toll debt and will continue to service it. He also confirmed that the provincial government has gone to the Development Bank of Southern Africa for a loan to be able to service the shortfall on e-tolls. The total e-toll debt that the provincial government has to pay back is more than R20-billion. This includes R12.9-billion for the historical debt, R4-billion for interest, and R4-billion for maintenance. The government has agreed to repay this debt in five equal annual instalments, with the first payment of R3.8-billion being made on September 30, 2024. 'This is another example of service delivery money being squashed by an irrational political commitment,' said Du Plessis. The party has called on Gauteng MEC for Roads, Transport and Logistics, Kedibone Diale-Thabela, and the head of the department, Thulani Mdadane, to urgently redirect funding and prevent a province-wide gridlock. 'New technology and the assistance of law enforcement would also go a long way to address this ever-escalating problem,' he added. The DA pledged to continue pressing the issue in the GPL, demanding answers and accountability from the ANC-led provincial government. 'A DA-led Gauteng government would not allow residents to be placed in such dangerous or frustrating situations,' he said. 'We will prioritise funding for traffic lights as a matter of extreme urgency to ensure the safety and well-being of all road users in Gauteng.' Do you have more information about the story? Please send us an email to bennittb@ or phone us on 083 625 4114. For free breaking and community news, visit Rekord's websites: Rekord East For more news and interesting articles, like Rekord on Facebook, follow us on Twitter or Instagram or TikTok At Caxton, we employ humans to generate daily fresh news, not AI intervention. Happy reading! Stay in the know. Download the Caxton Local News Network App Stay in the know. Download the Caxton Local News Network App here
Daily Maverick
15 hours ago
- Daily Maverick
Three Cheers for Three Percent: Re-anchoring Expectations in the South African Macroeconomy
The ongoing discourse surrounding a downward revision of the inflation target to a proposed point target 3.0%, has gained significant momentum following the May 2025 MPC statement. The Governor's language, suggesting such a change is nearing inevitability, reflects both technical, research-based consensus and evolving macroeconomic realities. In this article I offer some empirical and theoretical rationale for such a policy shift, focusing on its implications for yield curve dynamics, term premia and macroeconomic performance, while anchoring the argument in some popular econometric decompositions of the 10-year nominal bond yield. A cornerstone of the SARB's justification is the view that a lower inflation anchor promotes more favourable currency dynamics through both real and nominal channels. The SARB's own Quarterly Projection Model (QPM) simulations indicate that a credible downward revision of the target reduces expected inflation differentials with South Africa's trading partners, thereby fostering real exchange rate appreciation. A more competitive real exchange rate contributes to cheaper imported inputs, lowers domestic cost pressures, and ultimately deepens trade linkages. This appreciation is not merely mechanical. It is conditional on perceived credibility. As the SARB's working papers on the topic reveal, markets respond to a credible policy signal by re-weighting expectations of future average inflation, risk premia (including term premia and inflation-risk premia), and macro-volatility. In a series of demonstrated scenarios, the SARB shows that a 3.0% inflation target lowers the probability of inflation overshoots, narrows the confidence bands around forward inflation projections, and supports an appreciation of the rand in equilibrium. Such currency effects play a non-trivial role in aggregate demand dynamics. Lower expected inflation tightens the domestic-foreign interest rate spread via uncovered interest parity relationships and strengthens capital inflows. Notably, the Quarterly Projection Model includes a more complete uncovered interest parity condition that links real interest rate differentials, inflation expectations, and term premia. As fiscal credibility is enhanced and inflation is better anchored, the neutral real rate itself declines, supporting a more accommodative stance even as nominal policy rates remain unchanged. From a debt sustainability perspective, the commonly voiced concern is that tighter inflation targeting could elevate real interest rates and suppress growth, thereby worsening debt-to-GDP ratios. However, this argument presumes static risk premia, and fixed growth dynamics. When explicitly modelling the feedback between the fiscal balance and macroeconomic variables, analysis reveals that lower inflation expectations reduce risk premia and debt-service costs, especially on long-dated sovereign debt. This attenuates the risk of a deteriorating debt path. At the core of theoretical descriptions of the term structure of interest rates is the Expectations Hypothesis, which can be described somewhat informally by stating that the expected return from holding a long-dated bond of a given maturity should be the same as the expected return from rolling over a series of shorter-dated bonds for the same total maturity, or, more concretely, there should be no additional expected compensation (for example) priced in for the investor in a 10-year bond, than for an investor who embarks on a strategy to buy a series of 1-year bonds, rolling them over ten times consecutively. Traditionally viewed within the framework of the expectations hypothesis, the term premium encapsulates deviations from the hypothesis as it accounts for the uncertainty surrounding future short-term interest rates and economic factors that might impact long-term bond returns. Therefore, term premia are pivotal for central banks and financial institutions, as they provide insights into market expectations and the risk landscape within long-dated securities. Several competing econometric routines for term premia estimation have emerged in the relevant literature, but a particularly attractive one is that of Adrian, Crump, and Moench of the Federal Reserve Bank of New York, henceforth ACM. The graph below shows the decomposition of the 10-year yield into its constituent components using the ACM procedure: Adrian, Crump and Moench. From the diagram shown, on the assumption of a shared market assessment of credibility regarding the SARB, by lowering the official inflation target, the average expected inflation (last node on bottom-right of diagram) will gradually move towards the communicated 3.0% level, pulling the overall 10-year bond yield down along with it, ceteris parabus. In addition, empirical literature reveals that the inflation risk premium (top-right of diagram) is lower in regimes where average expected inflation is lower. The inflation risk premium, is, informally, something of a 'hazard based' compensation which the market demands as protection for inflation that may spike at times when the marginal utility of consumption is high (economic downturns). Moreover, the ACM framework and its associated literature empirically supports the view that term premia are sensitive to changes in the perceived stability of macroeconomic policy. The SARB's simulation exercises suggest that a more credible inflation target leads to tighter pricing of currency forward rates, lower volatility in excess returns, and enhanced arbitrage conditions across the yield curve. Such developments not only anchor inflation expectations but also reduce the expected compensation investors require for bearing duration risk. The so-called 'sacrifice ratio', or the GDP cost of reducing inflation, is often invoked in policy debates. However, empirical estimates (such those provided by the SARB themselves) for South Africa suggest that this ratio is comparatively low. As they note, the transmission from policy rate increases to output is dampened by the weak investment multiplier and a limited credit channel. As such, the disinflationary cost of moving from 4.5% to 3.0% is modest, relative to long-term gains in lower macro-volatility, tighter risk premia, and a more stable fiscal outlook. A further misconception is that a lower inflation target necessitates an uncomfortably higher path for the policy rate, and by extension, popular consumer credit rates. While this may hold mechanically in the short run, but interaction between central bank credibility, inflation expectations, and neutral real interest rates alters the equilibrium dynamics. In particular, the updated QPM includes a revised Taylor Rule that adjusts the policy stance not merely to inflation deviations, but also to movements in fiscal risk premia and global financial conditions. Under this richer framework, the policy rate need not increase materially to maintain a 3.0% inflation path. An additional layer of support comes from external benchmarking. Compared to emerging market peers, many of whom operate with 3.0% or even 2.0% inflation point targets, South Africa's 4.5% midpoint appears uncomfortably high. A floating bar chart of inflation target ranges, reconstructed from a recent peer comparison, reveals South Africa as something of an outlier. In targeting a lower rate, SARB would be moving into alignment with countries like Thailand and Chile, jurisdictions with stronger currency performance and lower sovereign spreads. Moreover, a lower inflation target enhances the SARB's ability to conduct countercyclical policy. As the lower bound on nominal interest rates becomes less binding, the central bank gains more policy space to respond to adverse shocks. This is particularly valuable in a global environment of volatile capital flows, asymmetric shocks, and rising geoeconomic fragmentation. In the context of South Africa's high unemployment and fragile growth, the case for 'expansionary disinflation' may seem counterintuitive. But as the SARB working papers stress, credible disinflation raises expected returns to investment, reduces the cost of capital, and improves budgetary outcomes by lowering interest burdens. In this sense, disinflation becomes a mechanism for reducing real distortions rather than amplifying them. One of the clearest benefits of improved inflation credibility is its impact on wage and price setting. Lower forward-looking inflation expectations enter directly into the wage bargaining process. This contributes to more stable unit labour costs, improved competitiveness, and less risk of cost-push spirals. These real effects are substantial and accumulate over time. Fiscally, the gains are self-reinforcing. As nominal GDP stabilises and interest payments fall, the primary balance improves. This reduces the borrowing requirement, compresses sovereign spreads, and ultimately reinforces the very dynamics that sustain the new inflation target. The SARB's internal simulations show that under a 3.0% objective, debt/GDP remains stable or declines in the outer years, which is an outcome driven not by fiscal consolidation, but by improved macro stability. A final benefit is reputational. Central banks that deliver on ambitious but credible targets enhance their standing in international capital markets. The rand's volatility, an enduring concern for global capital allocators, is dampened by tighter inflation targeting, improving the appeal of rand-denominated assets. The ACM research literature and associated yield decompositions confirm that a lower inflation target leads to flatter term structures and narrower risk premia. In conclusion, the move to a 3.0% inflation target constitutes a structural enhancement to South Africa's macro-financial framework. It tightens the link between policy credibility and financial market outcomes. Far from suppressing growth or worsening fiscal conditions, it unlocks a virtuous cycle: lower inflation expectations, stronger currency, reduced premia, and enhanced trade competitiveness. The SARB's own models, supported by international evidence and term structure theory, affirm that this path is not only feasible, but desirable. DM Author: Reza Ismail, Head of Bonds at Prescient Investment Management Disclaimer: Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. No action should be taken on the basis of this information without first seeking independent professional advice. The information contained herein is provided for general information purposes only. The information and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any document released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit
