4 days ago
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
