Template-Type: ReDIF-Paper 1.0
Title: Climate change riskrelated awareness and credit risk in the South African banking system
Abstract: This paper investigates the relationship between climate and environmental (C&E) engagement and credit risk in the South African banking sector over the period 20082023. Although climate-related risks are increasingly recognised as a material threat to financial stability, empirical evidence, especially in emerging markets, remains limited. South Africa presents a unique environment, characterised by high exposure to physical and transition climate risks, and associated with a soft-law, principles-based disclosure regime. Using this setting, we develop a novel text-based indicator of C&E engagement by analysing the C&E-related content of over 600 investor reports from domestic South African banks. Our empirical strategy combines fixed-effects panel regressions, instrumental variable estimation and Heckman selection models to assess the association between C&E engagement and credit portfolio quality, proxied by the non-performing loan (NPL) ratio and NPL growth. Results consistently indicate that banks with higher C&E engagement experience significantly lower impaired loan ratios, even after controlling for endogeneity. These findings suggest that, in an environment characterised by soft mandatory requirements, voluntary environmental disclosure serves as a credible signal of cautious risk management practices and contributes to enhanced credit quality.
Creation-Date: 2025-08-11
File-URL: https://www.resbank.co.za/content/dam/sarb/publications/working-papers/2025/climate-change-risk-related-awareness-and-credit-risk-in-the-south-african-banking-system.pdf
File-Format: application/pdf
File-Function: Revision
Number: 11084
Handle: RePEc:rbz:wpaper:11084