South African stakeholders grappling with the challenges accompanying the journey towards a just and sustainable economy may find a strong ally the country’s financial services sector. With its savvy incentivization and influence, sizable scale and reach, and pioneering transparency and measurement, SA’s FS poses a significant force. But is South Africa’s financial services sector ready to take on that mantle?
In short, absolutely. SA’s financial institutions are uniquely well placed to respond to the dilemma of how to balance the needs of a green economy with the demands of social and economic development. The longer answer: a number of factors need to be in place before the sector will be able to capitalize on its strengths.
It would be glib to assume that wealth and financial gain are the only influential factors driving our decisions — yet there is no denying that along with risk avoidance and loss these are significant motivators. Few other entities have as deep an understanding of how economics can incentivize and motivate individuals and companies. Innate to their very business model, financial institutions deal with these issues on a daily basis. For example, with innovative bundling of electric vehicle financing and insurance, a bank can rebalance upfront costs and the lifetime cost of ownership to fundamentally change the vehicle purchase proposition for a consumer. Similarly, the economic advantage of low cost financing available for sustainable projects is not difficult to motivate once you shift to a longer term viewpoint, especially once you take into account subsequent job creation opportunities. Discovery’s Vitality rewards program, which needs no introduction, is another great example of leveraging incentives to change individual behavior for the better. Similar incentive models can be used to incentivize consumers towards more sustainable choices.
Influence and inspiration
But innovative product and service offerings are not the only way to influence people. South Africa’s financial services sector is well populated by companies enjoying such tremendous visibility that they seemingly enjoy celebrity brand status. Along with this recognition comes a great deal of influence; not just here, but on the rest of the continent and even beyond. When an admired institution or figurehead implores us to adopt more environmentally-friendly habits, we are persuaded to listen. They would be wise to wield their influence well. When you consider the size of SA’s financial services sector — on a consolidated basis it is the third largest in the country — along with its extensive footprint (most South Africans over 16 years old have access to a bank account, savings scheme or insurance of some sort), it is easy to see just how much clout the sector carries. It’s important, though, that this clout isn’t limited to customers only. What good is it to convince customers to buy electric vehicles if the country lacks the infrastructure to drive and power them? Thus, financial institutions’ ability to influence policy makers on matters such as tax and manufacturing incentives is critical and offers much potential.
The sector’s ability to wield influence is not its only strength, however. South Africa’s financial institutions are also leading the way in transparency and disclosure. Their publication of Taskforce on Climate-related Financial Disclosures (TCFD) reports — a global standard for which Oliver Wyman has been a knowledge partner — is a case in point, and speaks not only to the fact that they are well-regulated, but also that they are becoming skilled at measuring and publicly reporting on the impact that they, and their customers, have on the environment. They’ve created a precedent for setting standards across the entire economy, serving as a paragon for other corporates as we aim for a more just and sustainable economy.
A R4-trillion-sized challenge — but financial institutions are the channel
Of course, when most of us think of financial institutions, we think of their role as intermediaries channeling capital and investment to where there is demand, and this is unlikely to change in the just economy. If anything, this role will become more important as banks seek and direct the flow of financing according to the needs of the just economy. One estimate by the Centre for Sustainability Transitions and the Blended Finance Taskforce was that South Africa requires around $250 billion in investment – approximately R4 trillion — over the next three decades if it is to transition from coal-based to renewable energy. It’s therefore no small task to finance and allocate that sum for maximum impact, tasks that the financial sector will have to play a key role in.
Many South African financial institutions have committed to Net Zero targets, and as they work towards achieving this goal, they will need to embark on an evolution which sees them adapting the way they design and price their products, and rethinking the factors behind their assessment of credit, operational and liquidity risks.
One thing stands out when it comes to providing the finance for that R4 trillion: it is certain to come from a mix of sources; many of which will require a return on their investment, and almost all of which will require accountability. In either case, delivery on expectations is vital — which is why the role of public sector funding is key. There’s a mission critical role for public sector institutions, development finance institutions and public-private models as we transition towards the just economy, and many are rising to the occasion.
As the transition progresses, we’re likely to get assistance from capital markets, too. One plus here is the depth of South Africa’s public and private capital markets compared with the rest of the continent.
Risk and responsibility
As we investigate the growing array of technologies and solutions we need to be realistic about the fact that we do not yet have the full solution set. When we know what works, we can direct investment towards it while seeking to address the management and execution risks — but otherwise, we’re in a stage of trial and error. Some solutions will fail, perhaps technologically or commercially, and this risk has to be underwritten by reliable and responsible parties. Again, the financial sector will play a big role here.
At the same time, we need to give careful thought to the management of the physical risks associated with climate change. We are seeing how this can affect communities: the recent KZN floods are an all too vivid example, showing us that even in the best-case scenario, neither humans nor companies will escape impact. The need to provide innovative and insurance solutions is clear and present.
Are we ready?
The big question is: are South Africa’s financial institutions ready for the stumbling blocks and difficulties that accompany the responsibilities they assume as we transition to the just economy? I believe that the answer is yes. The sector is strong and diversified, boasting sophisticated products which are certain to help all stakeholders — not just in South Africa, but also regionally and around the globe — develop innovative solutions to problems like water scarcity, energy production and biodiversity. It’s an exciting
More good news is that the financial sector is acting as a full ecosystem of increasingly aligned institutions, including stock exchanges, market infrastructure providers, ratings agencies, asset managers, analysts, financial news providers, professional industry associations and regulators. All have a special obligation to ensure that the transition unfolds in a manner that rejects greenwashing as far as possible — a serious issue — and that prioritizes the needs of the local economy, such as job creation. We therefore need to be clear on the metrics by which we measure success, especially when ESG ratings and scores notoriously vary according to which entity conducts them. And here, too, financial institutions can step forward, becoming key participants in clarifying definitions and entrenching the sector as part of the machinery responsible for measuring and transmitting metrics.
If a new, greener dawn is ahead for South Africa, one thing is for sure: the financial services sector has a major role to play.
Sandra Villars, Senior Advisor, published this article on August 08, 2022.