South African banks do not currently have any regulatory requirement to disclose information relating to how they are implementing Environmental, Social and Governance standards (ESG).
ESG is a collective term denoting how a business operates in terms of its impact on the environment and society, as well as how robust and transparent its governance structures are. ESG considerations not only benefit the environment but affect how investors view a company and can therefore drive improved economic performance. Banks should therefore be focussed not only on their own ESG standards and sustainability profile, but also the ESG risks and opportunities they are subject to as a lender.
International guidelines have been established by the Taskforce for Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) and it is up to national legislators and regulators to implement legislation to adhere to these guidelines.
As a result, the South African Reserve Bank (SARB) has published a Guidance Note to provide guidance to banks, branches of foreign institutions, and controlling companies regarding climate-related disclosures that are aligned to the TCFD and ISSB recommendations.
As yet, it is unclear as to when the banks will have to adhere to these ESG requirements, but the Prudential Authority has encouraged institutions to be proactive in managing their ESG disclosures and not wait for regulatory standards to be implemented. To facilitate this proactive approach, the SARB’s Guidance Note sets out the main principles that institutions should be implementing into their operations:
1. Produce climate-related disclosures which provide complete information including where data may be limited or incomplete and what assumptions and estimations have been made in providing the disclosures. The reports which are provided should compare sectors, industries and reporting periods; and to the extent there is any deviation in approach, these should be justified. The disclosures should also be reliable and objective and should provide information that is relevant not only to an institution’s current decisions but are also future-focussed.
2. Annual disclosures should be made on an institution’s processes and the role senior management play in how they are managing and overseeing climate-related risks.
3. Climate-related risks should be identified over the short, medium and long term and how these will impact the business’s strategy and financial plan.
4. Disclosures on an institution’s risk management policies should identify climate-related risks and how it aims to address these risks.
5. Substantive metrics and targets should be disclosed for stakeholders to be able to evaluate an institution’s exposure to and management of climate-related risks and opportunities.
Whilst these guidelines are intended to assist institutions proactively align their processes and operations to international standards, it is only a matter of time before such ESG-related disclosures will become mandatory and required by regulation.