Climate related risks to the financial sector A South African perspective Evolving risks, Evolving responses 17 th Annual International Conference on Policy challenges for the financial sector Presenter: Dr. Reshma Sheoraj, Director: Financial Sector Policy National Treasury 1 June 2017
Overview 1. Prioritizing climate risk: South Africa s perspective 2. Policy response: Managing risk and leveraging opportunities 3. Lessons learnt 4. Recommendations 2
Prioritizing climate risk: South Africa s perspective South Africa (SA) faces a series of environmental and social challenges Already experiencing worst drought in SA s history, with extreme flooding in certain parts: most SA crops are grown in areas that are not suitable with limited water supplies ominous signs of change dry seasons are becoming longer and wet seasons starting later SA s poor will be the hardest hit and significant pressure on national fiscus In time climate change could threaten financial resilience and longer-term economic prosperity SA signatory to Paris COP 21 significant climate financing gap, with limited public sector funding. Financial sector role in bridging gap as part of SA s climate adaptation strategy Policy focus on building a sustainable, inclusive, green economy - role of the financial sector important 3
Policy response: Managing risk & leveraging opportunities Policymakers have a clear interest in ensuring the financial system is resilient: Objectives of prudential regulation - protect policyholders/depositors by ensuring safety & soundness of financial system Managing risks - Understanding impact of climate shocks on financial stability and real economy and financial system But also Opportunities for investments into green economy green bonds, green infrastructure investments June 2016 National Treasury, with IFC/SECO convened first sustainable finance roundtable to start a conversation among SA s regulators and industry The goal of the workshop was to facilitate a discussion on key questions: What should a sustainable finance action plan look like for SA? What is already happening? What is required to identify and monitor climate risk? 4
Policy responses: Managing risk & leveraging opportunities contd Different parts of SA s financial sector have already adopted advanced approaches to sustainable finance in terms of voluntary principles and initiatives: widespread implementation of these approaches is still lacking regulatory agencies could play a stronger role in setting a shared national vision /strategy to align various initiatives and level playing field The roundtable informed National Treasury s input to global dialogue on green finance via the G20 Green Finance Study Group National Treasury, Banking Association further attended the 4 th Annual Meeting of the Sustainable Banking Network (SBN) Global dialogues confirmed the opportunity and benefits of developing an overarching shared vision and national strategy on sustainable finance to help meet national climate change commitments 5
Policy response: Managing risk & leveraging opportunities contd January 2017 National Treasury, with IFC/SBN establish a working group to develop a national strategy on sustainable finance which will take account of: global context for national approaches to sustainable finance understanding impact of climate risks on financial stability policy frameworks and commitments related to sustainable finance current and expected demand for green lending and sustainable finance voluntary practices and innovation across different parts of the financial sector barriers to green finance, opportunities and potential synergies between different parts of the financial sector recommendations for a national strategy on sustainable finance and the role of regulatory agencies Consultative process with support from financial sector to align Ownership of process critical 6
Lessons learnt Prioritize climate related policy issues - policy signals important to elevate discussion to agenda of regulators, financial service firm boards & exco Develop relevant indicators for setting targets: effective policymaking requires a robust set of indicators to identify major issues, formulate appropriate policy responses - assess, evaluate the potential policy impacts Collect appropriate data required to support the indicators role of regulators should climate related data form part of statutory reporting? Disclosure - effective disclosures are consistent, comparable, reliable - clear and efficient building into regulatory requirement Develop measurement framework to monitor progress That can be measured can bemanaged Work underway through SBN Measurement Working Group - 12 SBN member countries including South Africa to collectively take stock of current good practices and develop a measurement framework as a consistent tool to collect data and track progress Mandatory vs voluntary approaches to principles degree to which these entrenched in legislation through statutory objectives of regulators 7
Recommendations Consider how process structured, countries are at different stages of sustainable finance development process - need to start somewhere Regulatory approach, led by financial or banking regulators Industry-led voluntary approach Collaborative approach combining industry-led initiatives and policy leadership Should regulators adjust the capital regime for banks and insurers? danger of using prudential rules designed to protect financial stability for other ends rather focus should be on developing frameworks that help the market itself to adjust efficiently any efficient market reaction to climate change risks as well as the technologies and policies to address them must be founded on transparency of information. Better understanding of environmental risk analysis for regulated firms to guide their decision making - capacity building support required 8
Recommendations contd Need for momentum to be sustained & support for initiatives such a Sustainable Banking Network (SBN) voluntary community of financial regulators, banking associations and environmental regulators from emerging markets Objective to provide technical assistance, convene a global platform for practitioners; and capacity building and knowledge sharing, Sustainable finance is evolving rapidly to include the wider financial ecosystem, such as capital markets, insurance providers and pension funds need a cross cutting approach Collaboration required and need for alignment with all stakeholders WB,IFC, UNEP, G20, OECD & International standard setting authorities (BIS, IAIS, IOSCO), regulators & policy makers Accelerated action working together 9
Thank You Contact details: Dr. Reshma Sheoraj reshma.sheoraj@treasury.gov.za +27 82 528 1029