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The South African Prudential Authority (PA) issues “Flavour of the Year” Topics

Organisational Resilience and Climate-related Risks

The Prudential Authority (PA) issued a Guidance Note (GN) for banks and insurers that focuses on two “Flavour of the Year” topics: organisational resilience and climate-related risks. The PA has indicated that climate-risk will only be discussed with select financial institutions chosen on the basis of proportionality and relevance of the topic, and have set out their areas of focus in Annexure A of the GN. Given the global regulatory developments around climate-risk in the financial services industry, the intended engagement described within this Annexure is welcomed and much anticipated in the South African market and provides insight in terms of what can be expected by the PA going forward.

Annexure A largely encapsulates the messages and themes behind various international frameworks that have been widely adopted, including those of the Task Force on Climate-Related Financial Disclosures (TCFD). It focuses on 5 key areas:

For each of these areas of focus, the PA clearly lists the items they will cover with selected financial institutions.

There is a strong emphasis by the PA to obtain an understanding of where regulated institutions currently stand with regards to climate-related risks. Areas being looked at are their views on climate-related risks, how they are defined within the organisation, how they are expected to impact the organisation and, as a result, how their business model and strategy has evolved.

Annexure A also requires information on how roles and responsibilities have been assigned across board members and committees, and the extent of training and upskilling of key stakeholders within the organisation. Therefore, financial institutions will be expected to show that they have the right skills and competencies in place to govern and manage climate-relates risks.

From a risk management perspective, the PA is looking to get an understanding of how institutions incorporate climate-related risks into their risk appetite as well as across their risk management process (risk identification and assessment, monitoring and response reporting and escalation). Although there is no explicit mention of the ORSA/ICAAP in this GN, given trends we have seen in the UK and EU, we can foresee that the PA will expect to see how climate-related risks are embedded within these risk frameworks in due course.

As expected, scenario analysis is one of the 5 topics under consideration – although, it is unclear whether the PA will run an industry-wide stress-testing exercise similar to what was observed across other jurisdictions.  It is encouraging to see that the PA is wanting to engage with financial institutions around the challenges and concerns around scenario analyses. The maturity of scenario analyses in South Africa is still at the beginning stages and there are learnings that can be leveraged from global climate stress testing exercises.

Lastly the PA is also requesting information on internal and external reporting of climate-related risks. They are looking to understand how financial institutions are reporting on climate-related matters internally as well as the climate-related disclosures in use, including which frameworks are being applied to disclose climate-related risks and what type of information is being disclosed. It is encouraging to see that the Green Finance Taxonomy was also mentioned – indicating their consideration of the local sustainable finance reporting landscape and the potential integration and alignment of reporting with this taxonomy. Disclosure of green finance instruments and their allocation is also on their agenda.

The publication of the Guidance Note and its attaching Annexure A by the PA is a step in the right direction in aligning the South African industry with the steps taken by global supervisory bodies such as the Bank of England and the European Central Bank.  We see this as not reinventing the wheel for financial institutions; rather it is about demonstrating to the PA how climate-related risks are already being embedded within financial institutions, not only from a risk management and mitigation perspective but also with a key focus on how financial institutions can support a just transition to a greener economy.

Please see below our thought leadership which explores these areas of focus in more detail.


Impact of climate-related risks on financial services

Governance and Leadership

Climate change and banks: Questions Boards should be asking

The questions bank Boards should be asking about climate change

Risk Management

Climate risks in ORSAs - Key considerations

Embedding climate risk into banks’ credit risk management

Scenario Analysis and Stress Testing

Looking beyond the horizon of the evolving climate and credit risk modelling landscape in the UK banking industry

Reporting and Disclosure

Corporate reporting and climate change