Financing a Sustainable Economy

The National Treasury published on 15 May 2020 a draft technical paper: “Financing a Sustainable Economy” for public comment.

The draft paper aims to enable stakeholders to better understand the extent of the financial sector’s vulnerability to environmental and social (E&S) risks posed by climate change, water and air pollution, degradation and resource depletion. It is intended to represent the first formal steps to develop a more comprehensive approach to sustainable finance for the South African financial sector. It is produced by a sustainable finance working group led by the National Treasury, following round table discussions involving some 50 stakeholders, including regulatory bodies as well as representative organisations of the various parties involved in the financial industry.

The draft paper states that the immediate practical priorities and focus areas for the South African financial sector include:

• The importance of managing an emerging set of E&S risks and impacts.
• The risks and challenges posed by climate change and the role of the financial sector to respond to these.
• The growing importance of governance in addressing E&S risks and impacts.
• The need to develop or adopt additional methodologies to include the identification, management and disclosure of climate-related risks.

The draft paper addresses the following parties that are active in the financial sector:

• Banks
• Retirement funds
• Investment funds
• Collective investment schemes
• Private equity
• Capital markets
• Insurance

It provides an overview of the framework (binding as well as voluntary) that already applies to these parties and proposals for further action. Below we have listed some of the draft paper’s suggestions.

Banks 

For banks these include the development of a set of minimum requirements for sustainable finance and an analysis of feasible regulatory instruments which focus on formal climate risk management policies and strategies, disclosure of targets, methodologies and performance data. The draft paper also proposes the incorporation of climate risk management provisions and investment conditions into legal agreements as well as the disclosure of funding policies and exclusion lists. 

Retirement Funds

In relation to retirement funds, it is proposed that the supervisory authorities develop various measures, such as ensuring that all investment decisions should consider environmental and social factors as well as climate risk and to ensure the disclosure, monitoring and reporting of responsible finance investments. The authorities should also consider adopting guidelines for facilitating investment in sustainable finance investment vehicles or projects and green investments.

Insurers

Insurers are entities to which others transfer their risk but are also institutional investors in their own right. The draft paper considers that there is a challenge in the correct matching of risk and return to provide risk cover for, for example  the predicted more frequent and more extreme weather-related disasters, the changing demographics and emerging health issues linked to climate change and increasing pollution. The draft paper suggests that the authorities enhance the supervisory processes to deal more explicitly with sustainability risks and consider using regulatory instruments and supervisory tools to improve their understanding of climate risks and the impacts on insurers as well as on the financial system. The own risk and solvency assessment requirements should be enhanced to deal more explicitly with the risk management of sustainability and specifically climate risks.

Capital Markets

With regard to the capital markets, the suggestions are, for example, for exchanges to promote green, social and sustainability bonds and other product innovations, based on adherence to best practice criteria and principles, and to build credibility of these instruments. The regulators should develop a roadmap for increasing the contribution of capital markets to more sustainable financial markets.

Draft paper is open for comment

As measures are being developed for economic recovery from the Covid-19 pandemic, governments and the private sector must be attentive to the details of what a resilient, sustainable and fair recovery looks like in practice – to ensure greater resilience to further environmental and social crises ahead. The steps suggested in the draft paper have therefore become more important and urgent and could support a leading role of the South African financial industry in supporting the sustainable development of the national and regional economies.

The draft technical paper can be found at http://www.treasury.gov.za/publications/other/Sustainability%20technical%20paper%202020.pdf

Comments on the technical paper may be sent to financial.policy@treasury.gov.za by close of business on 30 June 2020.