Banks and insurers must face up to climate litigation threats, says South African supervisor

The supervisor has issued voluntary guidance ahead of future mandatory requirements.

Banks and insurers in South Africa could face stricter expectations on how they manage climate litigation risks and consider climate change in their capital-setting framework.

The Prudential Authority (PA), which is the supervisory arm of the South African Reserve Bank (SARB), has issued long-awaited draft guidance on integrating climate-related risks into the governance and risk management frameworks of the financial institutions under its purview.

Financial institutions were warned by the central bank last year to step up their climate action in anticipation of the incoming guidance, which it said would be “aligned with emerging international best practices”. SARB has yet to integrate mandatory climate-related requirements within its supervision and has not carried out a comprehensive climate stress test.

Under the draft guidance, financial institutions will have to ensure that internal compliance departments and boards have accounted for legal risks that could arise from a failure to disclose or manage climate-related exposures. Banks should monitor these risks on a continuous basis, while insurers should maintain a “risk register” tracking climate litigation cases, said the PA.

Banks and insurers will also be expected to account for climate-related risks when calculating the size of the capital buffers that will be set aside to absorb potential losses. Non-life insurers or those with shorter duration contacts have been encouraged to consider a longer-time horizon as climate risks “may take longer to fully materialise”.

Financial institutions have also been told to assign clear responsibilities for climate risks at board and senior management level. This will include incorporating climate risks within annual financial planning and risk management frameworks.

Boards should be able to provide “evidence” of their ongoing oversight if requested, said the PA.

The regulator issued four sets of guidance documents in total for banks and insurers, which separately address climate oversight practices and climate disclosures.

The disclosure-focused guidance builds on the TCFD framework and ISSB climate disclosure standards, and requires financial institutions to set out how climate issues have been integrated into their strategic planning and business practices.

No supervisory timeline has been set for enforcement but financial institutions should be “proactive and not wait for regulation or be compliance-driven”, said the PA. “Climate-related disclosures are expected to become mandatory over time.”

Guidance and notes are not usually released for public feedback; however, the central bank said that “the nascent nature of climate risk management” has prompted it to seek stakeholder input prior to finalising its position.

A consultation on the guidance is set to close on 13 September.

Old Mutual, one of South Africa’s largest asset managers, told Responsible Investor that it is currently reviewing the guidance and was unable to comment on specifics. Ninety One and Aeon Investment Management have also been approached.

Local shareholder activist group Just Share said any supervisory requirements on climate should be mandatory and include real consequences for non-compliance to be effective.

“Our analysis of disclosures by the top five banks reveal that good reporting can be used to disguise the lack of real progress,” said Just Share senior analyst Emma Schuster. “Most climate disclosures run to hundreds of pages, yet contain little in the way of real targets or strategies to reduce exposure to emissions, along science-aligned pathways.

“While all banks have made generalised commitments on climate, none has excluded financing for fossil gas, for example – and in fact almost all increased their exposure to fossil gas over the last year.”