South Africa's Prudential Authority issues climate-risk guidance for banks, including ICAAP integration

South Africa's Prudential Authority (PA) on 10 May 2024 published two guidance notes for banks on climate-related risk: G2/2024 on climate-related governance and risk practices, and G3/2024 on climate-related disclosures. It also published Guidance Notice 1 of 2024, which covers climate-related governance and risk practices for insurers.

The bank guidance notes were issued under section 6(5) of the Banks Act 94 of 1990 and apply to banks, branches of foreign institutions and controlling companies. G2/2024, signed by PA chief executive Fundi Tshazibana on 8 May 2024, states that it is intended to be applied on a proportionate basis, taking into account the size, nature and complexity of each institution and the overall level of risk it is willing to accept.

GOVERNANCE AND CAPITAL ASSESSMENT

Under G2/2024, boards of directors are responsible for the oversight and management of climate-related risks and should be able to evidence that oversight. Banks should identify climate-related risks that are material to their business models over various time horizons, incorporate them into their risk profiles, policies, strategy and financial planning, and show that they have been considered under credit, market, operational and liquidity risk. Banks are also expected to undertake transition planning in proportion to their size, business model and complexity.

The note guides banks to consider climate-related risks in their internal capital adequacy assessment process (ICAAP), developing a forward-looking view through scenario analysis and stress testing. Stress-test results should cover a minimum of three years and ideally five years or longer when banks evaluate capital adequacy. ICAAP documentation should set out the methodologies used, the risks identified, their potential impact on total internal capital and the mitigation strategies adopted, to allow for supervisory review.

DISCLOSURES AND INSURERS

G3/2024 provides guidance on climate-related disclosures, taking into consideration the International Sustainability Standards Board's climate-related disclosure standard, under the four thematic areas of governance, strategy, risk management, and metrics and targets.

For insurers, Guidance Notice 1 of 2024 aims to assist firms in complying with the PA's governance and operational standards on risk management and on the own risk and solvency assessment (ORSA) as they apply to climate-related risk. The notice states that guidance notices have no legal standing but provide clarity on how the relevant standards apply.