Business Day reported recently on an academic study that the Reserve Bank commissioned to look at SA banks’ exposure to climate-related transition risks. It was not just academic: the Bank has a mandate to safeguard SA’s financial stability. It has to be alert to factors that could put that stability at risk.
That means careful and constant monitoring and measuring of such risks. That in turn enables the Bank to use the macroprudential tools it has, or develop new ones to manage those risks, in partnership with SA’s financial sector, to try to prevent it from materialising. As was pointed out by bankers and the Bank itself at its AGM this week, SA has a good record of financial stability. It can boast an impressive record too on the soundness and stability of its banking system.
The climate study provides a timely and in-depth reminder of the risks and economic costs associated with climate change and with the imperative for SA to transition to a lower carbon economy. SA’s economy is exposed to fossil fuels, dependent as it is on coal for most of its electricity, but climate-related exposures span several other sectors too.
The risks are partly about the impact of climate change itself but the big systemic risks come potentially with the “green” transition, which will have huge negative impacts for some sectors just as it has positive impacts for others. There will be sectors such as coal left behind. There will be stranded assets.
For macroprudential and banking regulators, it’s the banks’ corporate loan books the potential systemic impact of which needs the closest watching and risk management. The study identifies six sectors with disproportionate exposure to climate transition risks: fossil fuels, utilities, energy-intensive sectors, transport, housing and agriculture.
That’s a shock figure of about R1-trillion. But it needs to be kept in perspective. It is found in the study that the exposure of SA banks’ corporate loans to transition exposures is not out of line with other countries. More importantly, while the numbers at risk that the study quotes may look huge, the exercise looks far into the future — 2040 in this case, so per annum are not enormous.
Banks and insurers are good at responding to slow-moving macro changes of all sorts, climate and transition shocks included. Managing risk is key to what banks do — and to the way their regulators regulate them. And that’s really why the study is important. It makes a series of recommendations for how the Bank, as regulator of the banking system, could use the tools it already has to manage the risks.
There are already sophisticated metrics banks are required to use to assess the various kinds of risk in the future, and the capital and liquidity buffers they are required to hold against that risk. Climate change and climate transition need to be added to the mix.
The Bank is working on understanding and mitigating the risks associated with climate change and is conducting stress tests to ensure the whole financial sector can remain sound and resilient. It has proved it can do that.
However, the big message from the study for SA to heed is that a delayed or disorderly climate transition can only increase the risks to financial stability.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.