In Conversation with Ms Fundi Tshazibana Deputy Governor of the South African Reserve Bank, Chief Executive Officer of the Prudential Authority, and NGFS Vice Chair

1. When and why did your institution join the NGFS? 

Three primary drivers led to our decision to join the NGFS in 2019:

First, South Africa relies heavily on fossil fuels for electricity generation. Transition towards greener electricity sources requires large structural changes, particularly in the electricity and mining sectors. The combination of policy actions to reduce emissions and large economic and financial frictions have the potential to generate large shocks, undermining economic and financial stability. The work of the NGFS helps central banks with understanding the economic and financial implications of domestic and global mitigation efforts. Since joining, we have benefited from the analysis done by the Network on understanding and managing climate-related transition risks.

Second, we are faced with more frequent and severe weather events such as floods and droughts. At the same time, we are less climate resilient compared to more advanced economies. Projections show that South Africa, like many other countries, will face significant climate related physical risks. Historically, extreme events have had large economic and financial implications. For example, the 2015-2016 Southern African drought yielded a 19% year-on-year increase in staple food prices and led to a significant increase in insurance claims. The 2022, floods in Kwa-Zulu Natal caused total losses worth approximately R54 billion, but the insurance sector only covered half of these losses. Working with other central banks and regulators in the NGFS helps us draw on each other experiences, develop a more comprehensive understanding of how physical risks are likely to impact the financial sector and develop effective responses. 

Third, climate change is a global issue that demands that central banks across the world collaborate, share knowledge and cooperate with one another. The NGFS has made strides in facilitating a global discourse on why and in which ways central banks ought to address climate-related risks. As the South African Reserve Bank (SARB), we knew we wanted to contribute to and learn from this crucial conversation. 

2. Can you share with us the key elements of the SARB’s climate strategy and how it fits into the broader national strategy in your jurisdiction? 

The SARB is constitutionally mandated to protect the value of the South African currency to enable sustainable growth. In essence, we must maintain an enabling and stable macroeconomic environment for balanced growth. Increasingly, we are seeing that climate considerations play a significant role in ensuring this. Therefore, the SARB has developed a Climate Change Program (CCP) that addresses several strategic objectives which ensure macroeconomic stability. Since the formalisation of our CCP in 2021, we have made significant progress towards the aims of the CCP. In particular, the CCP aims to:

1) Ensure that financial institutions and markets consider climate-related risks in their operations.
Our work towards this aim has been led by teams responsible from macroprudential and microprudential issues. After consultation and engagement, the Prudential Authority released several guidance notes for banks and insurers on climate risk-related disclosures and risk management and governance strategies. The Financial Stability Department is in the process of conducting Climate Risk Stress Tests (CRST) for banks and insurers for their potential application to macroprudential monitoring.

2) Understand the impacts of climate change on inflation and financial stability in order to take appropriate actions to mitigate against these risks.
A large part of understanding climate risks has come from our research. The SARB’s Economic Research Department has published notes and working papers highlighting climate change impactions of the SARB. In addition, international collaboration is critical for knowledge-sharing and capacity building – both of which ultimately ensure that we better understand climate-related economic threats. My appointment as Vice Chair of the NGFS in early 2024 reflects not only the important role that the SARB plays in the global effort to better understand the impacts of climate change, but also demonstrates our commitment to further our knowledge on this agenda. 

3) Green SARB’s own operations
The SARB, using learnings from the NGFS, has developed a carbon footprint reduction strategy and our own net zero strategy. This strategy envisages a 30% reduction in our carbon footprint by 2026 and an attainment of Net Zero by 2035.

3. To which extent did the SARB leverage the work of the NGFS in its own domestic journey? Any concrete examples? 

The SARB has leveraged the work produced through the NGFS extensively. The structure of our CCP is set up to allow us to incorporate NGFS insights into our own working and thinking around climate change and nature-related risks. Simultaneously, our program is set up to ensure that departments across the SARB can participate and contribute to NGFS activities. Hence, there are multiple examples of the benefits we have derived from the Network across the Bank, but I will highlight the following examples:

A core part of the Bank’s work that the NGFS has enriched is our economic research output. For example, the NGFS’s work on physical climate risks was used to inform our findings in a working paper on climate change and its implications for central banks in emerging and developing economies. Similarly, the NGFS work on transition planning and finance played an instrumental role in our understanding of transition and systemic risk in the South African banking sector assessment and, in turn, our domestic macroprudential options. Additionally, we have been able to use our research expertise to contribute to various NGFS reports. 

Another key example of the NGFS teachings in practice is through our work on climate scenarios and their application to CRST. We began by adopting what we deemed the three most relevant NGFS scenarios for the South African economy: 1.  Current Policies, 2. Delayed Transition, and 3. Net Zero 2050. These global scenarios were used to understand South African-specific climate impacts.

To localise these scenarios, we have used two models to assess physical and transition risks to the South African economy until 2050. Specifically, the Systematic Analysis for Climate Resilient Development (SACReD) model framework has been used to estimate physical climate impacts by combining global and domestic climate conditions to ascertain how these could affect the economy. For transition risks, we deployed the South African TIMES Model linked to an economy-wide model (SATIM-GE), allowing us to gauge transition impacts using an energy-economic nexus-based model. 

4. One last word? 

We find ourselves at a critical crossroads. On the one hand, we have more information about the potentially deleterious consequences that climate risks pose to our economies than ever before. On the other hand, we face a very real risk of climate action rollback at a global level, despite having come so far. Analytical facts are our most powerful tool to influence the global climate policy agenda. Robust analytical analysis is indisputable and reliable. Therefore, we must continue to improve our data, models and, in turn, insights. A key part of enabling the persistent momentum in credible information generation is capacity building. Put simply, we are stronger together and the more of us that can do these analyses, the more actionable information we will have to appropriately tackle the climate risks which face us today and in future.