P O Box 427 Pretoria 0001 South Africa
370 Helen Joseph Street Pretoria 0002
+27 12 313 3911 / 0861 12 7272
www.resbank.co.za

Prudential Communication 10 of 2022
Climate–related risks
Objective of this Prudential Communication
This communication provides the initial views of the Prudential Authority (PA) on climaterelated risks and their potential impact on financial institutions supervised by the PA. It aims
to highlight the importance of considering the potential impacts from these risks on thebusiness of financial institutions.
1.

Application

1.1

This Prudential Communication is applicable to all registered banks1, mutual banks,licensed insurers and licensed financial market infrastructures supervised by thePrudential Authority (PA).

2.

Purpose2.1.

The purpose of this Prudential Communication is to:a. Provide an overview of the impact of climate change, climate risk2 drivers and theinterconnectedness to financial risks within the context of the regulatory andsupervisory mandate of the PA;
b. Highlight the important role played by the boards and senior management offinancial institutions in considering climate-related risks, and managing theserisks in terms of governance, strategy, and risk management considerations; andc. Describe some of the PA’s current climate risk related initiatives as these relate
to the PA’s approach to oversight of climate related risks in supervised financial
institutions falling within the regulatory and supervisory remit of the PA.3

3.

Introduction

3.1.

The effects of climate change have been recognised as an overarching global threat
impacting human, societal, environmental, and economic systems through rising

1

Excluding co-operative banks, and co-operative financial institutions

2 The National Treasury in its technical paper entitled “Financing a Sustainable Economy” and published in2021 referenced climate risk as climate change and greenhouse gas emissions but may also include
considerations that are cognisant of wider environmental factors and associated risks.
3 The NT paper “Financing A Sustainable Economy” identified that managing and disclosing climate risk was
an area of urgent demand for the financial sector, building on international standards such as those of theFinancial Stability Boards Taskforce on Climate-related Financial Disclosure (TCFD). Include the work on“Guide to climate scenario analysis for central banks and supervisors by the Network for Greening the Financial
System: https://www.ngfs.net/sites/default/files/medias/documents/ngfs_guide_scenario_analysis_final.pdf
1

global temperatures, rising sea levels and an increasing frequency/severity of natural
catastrophes and extreme weather events.4
3.2.

Climate–related risk is regarded as a systemic risk and acknowledged globally bycentral banks as a financial risk which affects financial stability.5 The effective
management and mitigation of such risks is important to central banks andsupervisors in terms of ensuring a financial system that is resilient to these risks.6

3.3.

The severity and impact of climate change has been explicitly illustrated domesticallyin recent times through incidences of flooding, droughts, and wildfires across most ofSouth Africa’s provinces. Climate-related risks materialise further as economies
adopt and implement measures to shift towards scenarios that lower greenhouse gas
emissions, which has significant financial implications for the entities supervised by
the PA.

3.4.

The PA, in terms of its statutory objectives and mandate, has embarked on various
initiatives through its Prudential Authority Climate Task Team (PACTT). The
initiatives are aimed at promoting and developing a regulatory and supervisory
response to climate risks impacting supervised institutions.

3.5.

Supervised institutions that have a comprehensive understanding of the impact ofclimate risk will be better positioned to formulate and implement risk management
and mitigation processes that could enhance financial resilience and inform
appropriate strategic and business decisions.

3.6.

The Prudential Communication provides an outline of the financial risks stemmingfrom climate change together with the PA’s considerations and expectations of banks,insurers, and financial market infrastructures.

4.

Financial Risks Stemming from Climate Change

4.1.

The impact of climate change on traditional risk categories usually considered bysupervised institutions (e.g., credit risk, market risk, underwriting risk, operational risk,
liquidity risk and reputational risk) could be significant.7 The multi-dimensional natureof the risks arising from climate change present significant challenges to supervised
institutions in relation to the traditional approach to financial risk identification andquantification. This is especially so given the unique characteristics of climate related
financial risks which include the extensive breadth and magnitude of the risk,
including its uncertainty over prolonged time horizons. There is also the inevitabilityof certain shocks regardless of measures taken, which require pre-emptive measures
to build resilience and adaptability among supervised institutions.

4.2.

Financial risk impacts will manifest through two primary transmission channels being
physical and transition risks.

4 IAIS – Application Paper on the Supervision of Climate-related Risks in the Insurance Sector. October 2020.
5 As defined in the Basel Committee on Banking Supervision “Climate-related financial risks – measurement

and methodologies. https://www.bis.org/bcbs/publ/d518.pdf
6 (NGFS, A call for action – Climate change as a source of financial risk, 2019)
7 Climate related risk drivers and their transmission channels (bis.org)

2

4.3.

Physical risk arises from the materialisation of climate change and environmental
degradation. These can further be expanded to chronic physical risks and acutephysical risks.8a.

Chronic physical risk refers to those risks that will arise due to the gradualchange of climate patterns over time. These include for example changes inwind, air and sea temperature, water levels and precipitation patterns.

b.

Acute physical risks refer to event-driven hazards that are becoming more
frequent and more severe because of climate change. These events include
floods, droughts, storms such as hailstorms and cyclones, and heatwaves.

4.4.

Physical risks could have an impact on financial institutions’ assets and liabilities aswell as operations through for example supply chain disruptions and/or damages to
its own property.

4.5.

Financial institutions invest in, finance and/or provide insurance for property andinfrastructure that could be damaged by either acute or chronic climate-relatedevents. In addition, financial institutions also invest in other entities of which theireconomic activities could also be impacted. This could lead to investment, credit andunderwriting losses and ultimately influence the financing and insurability of future
developments.

4.6.

Transition risk refers to those risks associated with a global and domestic transition
to a low greenhouse gas economy. These could include changes in climate-related
policy and regulation, changes in the behavioural patterns of individuals andbusinesses (relative to climate change) and the emergence of new technologies andbusiness models. It also relates to the net zero plans and policies of current and future
trading partners and the overall pace at which the transition will occur.9

4.7.

Low greenhouse gas emissions are crucial to keep global temperatures within an
acceptable range, building resilience to potential unreversible consequences ofclimate change and positively affect the frequency and severity of future physicalclimate-related events.

4.8.

Increasing awareness of the importance of lowering greenhouse gas emissions has
started to drive diverse initiatives globally and locally that will result in changes to therisk and return profile of certain economic activities and associated financial assets
and liabilities but also present numerous opportunities in terms of new types of assets
and products for the financial sector.

4.9.

Supervised institutions, their boards and senior management would need to deal withchanges to the valuation, pricing, and insurability of affected assets as individuals,businesses and governments adapt their economic behaviour to the effects of climatechange.

4.10. Furthermore, it is important to consider the potential social risks that may arise as aconsequence of these behavioural changes required to reduce greenhouse gas
emissions. These include for example impacts on societies, communities andindividuals that may be strongly tied to certain economic activities.

8 (NGFS, A call for action – Climate change as a source of financial risk, 2019)
9 (NGFS, A call for action – Climate change as a source of financial risk, 2019)35.

Expectations

5.1.

Given the potential financial impacts described above, it is important for supervised
institutions to enhance their knowledge and understanding of climate-related risks
and how their business models could be influenced and affected by it.

5.2.

Supervised institutions should consider climate-related risks as part of theirgovernance, risk management and internal and external reporting frameworks andidentify any consequential impacts on their strategies and business plans. It is also
important to take appropriate actions to build and/or increase resilience to sucheffects.

5.3.

Supervised institutions should identify important climate-related information to bedisclosed to stakeholders and include it as part of their disclosure frameworks. The
recommendations issued by the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (TCFD) could serve as important guidelines in thisrespect.

6.

Way Forward

6.1.

The PA will continue to advance its approved climate risk initiatives through thePACTT. The initiatives are geared toward capacity building and the enhancement of
the PA’s regulatory and supervisory frameworks and practices.

6.2.

a.

The PA is in the process of developing supervisory guidance for frontline
supervision departments that will assist supervisory teams in their climaterelated engagements with regulated entities.

b.

The PA will issue specific regulatory guidance in 2023 on its expectations on
how climate risks should be integrated into supervised institutions’ riskmanagement, governance and reporting processes in accordance with its
internal roadmap. This regulatory guidance will be aligned with emerging
international best practice.

The PA will augment its supervisory monitoring capability of climate risks in 2023
through business-as-usual supervision across all supervised institutions. To this end
the PA will start to monitor how supervised financial institutions have approached theintegration of climate risk into their governance, risk management and reporting
processes.

Fundi Tshazibana
Chief Executive Officer
Date: 03/08/224