Sustainability Initiatives In The South African Financial Sector
As a developing country, South Africa’s infrastructure and society are especially vulnerable to the impacts of climate change and the financial sector has an important role to play in supporting a just transition to a low carbon economy.
Despite the strength of the sector, financial institutions face a broad range of challenges in South Africa, including high levels of unemployment, ageing infrastructure, electricity shortages and one of the world’s highest GINI coefficients.
The financial sector in South Africa has already made significant progress in moving the country towards a more sustainable economy, including Regulation 28 of the Pension Funds Act (which requires pension fund trustees to consider ESG risks) and the Code for Responsible Investment in South Africa (CRISA), the development of the Banking Association of South Africa’s Code for Environmental and Social Risk, the launching a green bond segment of the JSE, the introduction of a carbon tax and leading South African Bank’s stopping financing new coal projects.
South Africa Sustainable Finance Initiative
In January 2017, South Africa’s National Treasury convened a Working Group of financial sector regulatory agencies and industry associations to develop a framework document on sustainable finance.
Sustainable finance initiatives in South Africa have taken two distinct forms: those that are driven by the government through regulation and those that have been led by industry.
In the absence of an overarching regulatory and policy framework, the primary driving force behind sustainable finance initiatives has often been the industry itself, largely through voluntary industry association-led initiatives or through international sector-specific initiatives. However, there has been minimal consistency or coordination within industry sub-sectors.
South African Sustainability Principles, Standards, Codes and Guidelines
Sustainable finance in South Africa relies predominantly on voluntary initiatives, the implementation of which are currently not supervised by any regulatory authorities.
These voluntary initiatives are a combination of adherence to internationally and locally developed standards. The application of these standards by individual financial institutions varies and there is no standardized approach to environmental and social risk management in South Africa for most financial products.
Several guidelines and frameworks for E&S risk management are already in place in South Africa and these provide a degree of commonality to the implementation strategies for the various subsectors. They include:
The Banking Association of South Africa (BASA) has mandatory Principles for Environmental and Social Risk that all its members must implement, but there is no enforcement method. The Principles recognize the role that banks can play in the protection, promotion and fulfilment of social, economic and environmental rights in South Africa by conducting and reporting on their operations, business, lending and investing practices in a sustainable manner.
In response, the Regulation 28 of the Pension Funds Act and the Institute of Directors South Africa have developed a Code for Responsible Investment in South Africa (CRISA), which applies to asset owners and managers and gives effect to Regulation 28. CRISA is a voluntary initiative and does not have a formal signatory or enforcement mechanism.
King IV requires governing bodies to demonstrate thinking that integrates environmental and social aspects as part of a six capitals model (financial; manufacturing; human; social and relationship; intellectual; and natural capital), into value creation strategies and operations. No minimum standards or practice guidance on this integration is included. The Code is voluntary and contains no sanctions, except for JSE listed companies (including South Africa’s leading banks), which are required to incorporate the principles into their business practices.
Under the Code, organizations must establish corporate governance structures to provide oversight in respect of financial, environmental, social, human and natural capitals. These focus areas seek to promote the long-term sustainability of business and material issues are reported in annual integrated reports.
International Guidelines being implemented in South Africa
Local South African Banks, ABSA, First Rand, Nedbank and Standard Bank are all signatories of the Equator Principles, a risk management framework adopted by financial institutions for determining, assessing and managing environmental and social risks for project finance, project finance advisory, project-related corporate loans and bridge loans.
Source: The Equator Principles
South African banks have played a prominent role in the development of UNEP’s Principles for Responsible Banking. The Principles provide the framework for the sustainable banking system of the future and help the industry to demonstrate how it makes a positive contribution to society. They seek to accelerate the banking industry’s contribution to achieving society’s goals as expressed in the Sustainable Development Goals and the Paris Climate Agreement.
Source: UNEP FI
To help identify the information needed by investors, lenders and insurance underwriters to appropriately assess and price climate-related risks and opportunities, the Financial Stability Board established an industry-led task force: The Task Force on Climate-related Financial Disclosures (Task Force). The Task Force produced voluntary Recommendations on Climate-related Financial Disclosures.
The Task Force’s four widely adoptable recommendations on climate-related financial disclosures are applicable to organizations across sectors and jurisdictions. Importantly, the Task Force’s recommendations apply to financial-sector organizations, including banks, insurance companies, asset managers, and asset owners and are gaining considerable traction in the South African banking sector.