The South African government is in the process of enacting a range of policy and legislative developments relating to climate change. The Climate Change Bill, which among other things will require government entities to align their policies to take into account climate change risks and require the government to set legally binding greenhouse gas emissions targets, went before the country’s parliament in February 2022; at the time of writing, it is still passing through the legislative process, but has received substantial public comment.1 In 2020, the South African government established the Presidential Climate Commission (PCC), an independent multi-stakeholder body, to provide independent expert advice on the country’s climate change response and facilitate a common vision for a net zero and climate resilient economy and society by 2050.2 The PCC has three main focus areas: a just transition framework, the just energy transition and climate finance.
The just transition framework tackles practical issues relating to jobs, local economies, skills, social support, and governance. The PCC unanimously adopted the Just Transition Framework at its Sixth Meeting held on the 27th of May 2022 following months of research and intense consultations with various social partners and communities across the country. The Framework provides a much-needed definition of a Just Transition which highlights the effects of climate change, especially on vulnerable groups, as well as the potential impact of a low-carbon transition on employment in carbon-intensive sectors. It sets out principles for minimizing these impacts, increasing social resilience, and putting people at the centre of decision making.
The National Adaptation Strategy, which was adopted by South Africa’s cabinet in October 2017, serves as binding guidance for sectors on preparing for the impact of climate change.3 South Africa has had a tax on greenhouse gas emissions since 2019 under the Carbon Tax Act, 2019. In the 2022 budget, the National Treasury announced that this levy would increase to reach US$20 per tonne by 2025, in line with the government's commitments made at the 26th Conference of Parties to the UNFCCC (COP 26), and that from 2026 onwards, the rate of increase would increase rapidly to at least US$30 per tonne by 2030 and allowances would fall away.4The Act also gives effect to the “polluter pays” principle for large emitters and helps to ensure that companies and consumers take the negative adverse costs (externalities) into account in their future production, consumption and investment decisions. Companies are thus incentivized towards adopting cleaner technologies over the next decade and beyond.
In October 2021, the National Treasury published its Financing a Sustainable Economy: Technical Paper, which identifies “the need to develop or adapt additional methodologies, to include specifically the identification, management and disclosure of climate-related risks” as a priority for the South African financial sector. Following this, the Climate Risk Forum, a public-private financial sector collaboration initiative was established in June 2020 to implement the recommendations of the Technical Paper. It is hosted by the Banking Association South Africa and chaired by National Treasury. In December 2021, the Disclosure Working Group under the Climate Risk Forum published “Principles and Guidance for Minimum Disclosure of Climate Related Risks and Opportunities”. The document aims to guide and inform regulators and financial sector users of the minimum expectations for good financial disclosure of climate-related risks and opportunities, including how to implement the recommendations of the Task Force on Climate-related Disclosures (TCFD). It defines “risk management” as “…a set of processes that are carried out by an organization’s board and management to support the achievement of the organization’s objectives by addressing its risks and managing the combined potential impact of those risks.”5 It also maps out both the opportunities (particularly new investment opportunities) and risks (both physical and transition risks) associated with climate change. Transition risks include policy, legal, technology, market and reputation risks for companies and financial institutions that don’t adopt a proactive strategy to future-proof their business models, processes, and compliance activities. Physical risks include chronic risks, which are longer term shifts in climate patterns, such as continual higher temperatures and sea level rise, and acute risks, such as floods, droughts and other extreme weather events.
Another outcome of the National Treasury’s Technical Paper on Financing a Sustainable Economy was the release in March 2022 of a National Green Finance Taxonomy.6 The Green Finance Taxonomy aligns with international best practices, and particularly the European Union’s Sustainable Finance Taxonomy, to provide a standard methodology for classifying, labelling and reporting on ‘green’ investments in the South African context, namely investments that have environmental benefits. South Africa chose to align with the EU taxonomy in order to leverage the technical content of the latter and to facilitate investment in South Africa by EU investors that are now required to report their alignment with the EU taxonomy. Both the EU and South Africa taxonomies identify 6 environmental objectives. To be taxonomy aligned, eligible activities must i) make a substantial contribution to one of the 6 environmental objectives, ii) must meet technical criteria for the selected activities, iii) may not do significant harm to any of the other environmental objectives, and iv) must adhere to social safeguards. As with the EU Taxonomy, South Africa’s Green Finance Taxonomy has so far only identified activities under the first two environmental objectives, which are climate change mitigation and climate change adaptation. The South Africa Taxonomy is currently voluntary and there are not yet any implementation or disclosure regulations. However, National Treasury is looking to the Reserve Bank and Financial Sector Conduct Authority (FSCA) to develop plans for implementation. In its March 2023 “Statement on Sustainable Finance and Programme of Work”, the FSCA states that it will “through endorsement and engagements with supervised entities, actively encourage voluntary adoption and use of the taxonomy in relevant activities. Over the longer term, work will be done to consider the extent that the taxonomy should be mandated.” The FSCA also states that this work will be “undertaken in close conjunction with the Prudential Authority” and that “Any regulatory initiatives undertaken in relation to the taxonomy will seek to avoid duplications or inconsistencies between the two authorities.”
The South African Reserve Bank (SARB), Prudential Authority (PA) and Financial Sector Conduct Authority (FSCA) each recognize that climate change poses systemic risks to the financial system. In 2019, the PA surveyed the South African banking and insurance sector’s implementation of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. As a result, the PA stated its intent to enhance its supervision of climate-related financial risks and to publish guidelines “outlining proposals to insurers and banks to consider climate risks”.7
The PA then conducted a survey of financial institutions to examine their responses to specific climate risks which are the subject of supervisory focus.8 As a result, in August 2022, the PA issued a Prudential Communication reiterating that climate change poses a financial stability risk.9
The SARB’s 2022 Annual Report recommends that the PA should assess and amend the regulatory and supervisory frameworks to account for climate change risks as part of the SARB’s climate change programme. The SARB also aims to develop its macroprudential monitoring framework to increase climate resilience and establish monetary policy guidelines to respond to physical and transition risks.10
The regulatory focus upon addressing climate-related financial risks also led to the establishment of the Prudential Authority Climate Think Tank (PACTT) in September 2020.11 The PACTT’s mandate is to promote, develop and coordinate the Prudential Authority’s regulatory and supervisory response to climate risks.
The PA has determined that for the 2023 calendar year climate risk would only be discussed with selected financial institutions as “climate risk management frameworks are nascent, and require specialist skills, capacity, and data.”12
Directors’ Duties and Climate Change
The fiduciary duties of South African directors that have been partially codified in the Companies Act 71 of 2008 (Companies Act), are mandatory, and apply to all companies. The general duties of directors fall into two categories: fiduciary duties of good faith, honesty and loyalty; and the duty to exercise reasonable care, skill and diligence, which is not a fiduciary duty and instead centres on the issue of competence.
A 2018 report by the Commonwealth Climate and Law Initiative concluded that “fiduciary and other company law duties requiring company directors to act in the best interests of the company are likely to apply in the climate-risk context, given the material financial risks that climate change poses, which are foreseeable, requiring company directors to develop strategies to manage these risks”.13 These duties evolve with the values of society and what is considered to be the industry norm, or ‘best practice’, at any given time. In the South African context, the King Report, and the Constitution and Bill of Rights, are of particular relevance to the framing of climate issues within directors' duties.
A forthcoming legal opinion by the Centre for Environmental Rights finds that in light of South African company law in relation to fiduciary duties, corporate governance requirements, environmental legislation and policy and regulatory developments, directors of South African companies and financial institutions are required to consider climate-related financial risks when fulfilling their legal duties.14
On the issue of investor fiduciary duties and climate change, a leading South African pension lawyer, Rosemary Hunter of law firm Fasken, published an opinion in April 2019 that found that the boards of South African pension and provident funds are required, per their fiduciary duties, to fully consider climate risk when making investment decisions (the Fasken opinion).15Failure to do so exposes trustees to the threat of legal liability for losses incurred by the fund as a result.
Directors' Disclosure Obligations and Climate Change
According to the 2016 King IV Report on Corporate Governance (King IV),16 boards are advised that, in preparing their integrated report, they must address “matters that could significantly affect the organisation’s ability to create value”. King IV explicitly links value creation to the six capitals, one of which is natural capital. Entities listed on the Johannesburg Stock Exchange must report on their compliance with King IV’s disclosure and application regime as part of their annual report.17 Non-listed entities are also encouraged to comply.
Disclosure in accordance with the TCFD’s recommendations is also becoming a norm in South Africa. In a survey conducted by the PA, 67% of banks and 100% of non-life insurers stated they intended to make TCFD-aligned disclosures in financial year 2019-2020.18 Furthermore, in November 2020 the Code for Responsible Investing in South Africa (CRISA) Committee released their draft revised Code.19 The Code calls upon institutional investors to integrate sustainable finance practices (including climate resilience activities) into their operations and to disclose how such practices are being integrated, which standards, guidelines or models are being used and the outcomes of such implementation.
South Africa is considering developing climate disclosure requirements for financial institutions, and the Prudential Authority has noted that the TCFD framework may be a useful disclosure tool.20 The Johannesburg Stock Exchange (JSE) has launched guidance on sustainability and climate change disclosure for issuers.21 The guidance is aligned with global standards including the TCFD recommendations and the Exposure Drafts of the General Sustainability Disclosure Standard (S1) and the Climate Disclosure Standard (S2) of the International Sustainability Standards Board (ISSB) of the IFRS Foundation (which is informed by the TCFD recommendations, and the King IV Guidance Paper on Responsibilities of Governing Bodies in Responding to Climate Change), and recommends that issuers follow a three-stage process: disclosure diagnosis and context, integrating climate risks, and disclosing climate-related information.22The JSE Guidance has a dedicated section on the assessment of material climate-related impacts, risks and opportunities and refers to the “double-materiality” approach, which considers both financial materiality (sustainability issues that could affect the company’s operational and financial position) and impact materiality (the company’s impacts on people, the environment and the economy).23 The JSE Guidance makes reference to carbon reporting, sets out principles for useful disclosure and provides guidance on what climate-related information a company should disclose.
Therefore, while TCFD-aligned disclosures are not currently required of South African companies, boards may wish to prepare for such disclosures becoming mandatory.
The science is clear that the wellbeing and resilience of the earth systems and society are inextinguishably interlinked.24 Therefore there is growing global appreciation that the impacts of climate change and biodiversity loss should be addressed in a synergistic and integrated way25. It is expected that the Kunming-Montreal Global Biodiversity Framework, released at COP15 in Montreal, Canada in December 202226, and the forthcoming publication of the final Task Force on Nature-related Financial Disclosure (TNFD)27 framework expected during September 2023 will serve as international best practice for future policy and legislative developments.
As described above in relation to climate, the South African Constitution and Bill of Rights are highly relevant in framing biodiversity loss in relation to fiduciary duties, in particular the right “to have the environment protected for the benefit of present and future generations” through measures that "(i) prevent …ecological degradation; (ii) promote conservation and (iii) secure ecologically sustainable development and use of natural resources". South Africa’s first draft White Paper on the Conservation and Sustainable Use of Biodiversity recognises the importance of biodiversity and anticipates future laws and amendments to existing laws to protect biodiversity. South African courts, through numerous decisions, have also upheld and emphasised the rights of Indigenous communities in relation to nature.
As mentioned above, King IV links value creation to natural capital and specifically mentions biodiversity in relation to monitoring the consequences of a company’s activities. King IV’s definitions of good governance, reporting and risk management refer to the company’s uses of and effects on natural capital.
The National Environmental Management Act, 1998 (NEMA) imposes on directors a duty of care to take reasonable measures to ensure the prevention, minimisation and rectification of environmental harms, combined with broad enforcement powers of regulators, including the potential to recover remediation costs from directors and the rights of individual citizens to institute proceedings.
Stewardship and responsible investment have emerged as key components of South African governance, with trends within the financial industry such as the newly adopted Green Finance Taxonomy and the JSE including biodiversity indicators and ‘double’ materiality in its guidance for narrative disclosures. Financial institutions in South Africa have been found to have significant exposure to nature-related risks such as biodiversity loss.  This leads to the reasonable conclusion that companies and directors in the South African market may already or soon be exposed to biodiversity-related risks.
Practical Implications for Directors
Given that regulators in South Africa have become increasingly emphatic regarding the need for companies and their directors to adopt climate resilience measures in business practices and disclosure, and in particular the above-noted recognition of climate risk by the Reserve Bank Prudential Authority and Financial Sector Conduct Authority, the Government’s coordination of sustainable finance analysis, the Faskin opinion on pension funds’ climate change obligations, and King IV Report on Corporate Governance, well-counselled boards will:
- delegate identification and evaluation of climate risk (both physical and transition risks) associated with the company’s business model, operations, activities, and supply chain, as well as risks and opportunities related to climate change adaptation and the just transition (both to the company and society), to a clearly-identified team in management which reports directly to the CEO and board; The risk assessment process should utilise recognised climate scenarios to test the risks to the business and its stakeholders;
- put on the agenda for the board within 3 to 6 months a process to develop a climate transition and adaptation roadmap to 2050 with transparent carbon neutrality or reduction, just transition and climate adaptation targets, with clear interim science-based targets to 2040, 2030, and within the current rolling multi-year strategic plan, and periodically thereafter report back to the board;
- delegate to the appropriate committee(s) of the board, such as risk, audit, legal and governance, scenarios/strategy, nominations/remuneration, or sustainability/corporate responsibility, the task of translating the long-term strategy into a clear decision-making process for each aspect that is relevant to each committee; and
- in consultation with disclosure counsel, to develop an external engagement and communications plan and to oversee rigorous disclosure and accounting.
- Commonwealth Climate and Law Initiative