By signing the Paris Agreement, South Africa committed to transforming its economy to contribute to keeping global temperature rises well below 2°C. This transformation will inevitably impact financial institutions and could represent a systemic risk for the financial sector. According to central bank and academic research, an orderly transition should not jeopardize financial stability – but understanding transition risks for the banking sector, monitoring them and, when necessary, implementing macroprudential measures is necessary to ensure this stability.
This paper is a step towards achieving this outcome. It presents the main transition risks for the South African banking sector, highlighting that the coal value chain is central to these risks. It assesses the banking system’s exposure to transition risks in the corporate sector, showing that they are material and widespread. It concludes by suggesting some macroprudential policy options that could address these risks.