Climaterelated transition risks in Southern African banks financial exposure and policy implications

Paola DOrazio, Torsten Schmidt and Maximilian Dirks

No 11085, Working Papers from South African Reserve Bank

Abstract: This paper investigates climate-related transition risks in the financial sectors of Botswana, Namibia, Mozambique and South Africa, focusing on exposure to carbon-intensive industries and the macrofinancial transmission of transition shocks. Drawing on sectoral loan allocation data, greenhouse gas emissions and transition risk metrics, the analysis applies the Climate Policy Relevant Sectors taxonomy, loan carbon intensity and a transition risk index to quantify financial sector vulnerabilities across the four economies. To assess the macrofinancial effects of transition risk shocks, a set of country-specific Bayesian vector autoregression models is estimated. The results reveal heterogeneous responses: while transition shocks lead to current account deterioration in Namibia and South Africa, trade volumes show resilience or expansion, particularly in Botswana. Credit supply and non-performing loans respond only modestly, with financial sector effects remaining limited and sensitive to identification strategies. The findings underscore the importance of integrating transition risk into financial supervisory frameworks. Enhancing climate-related prudential regulation through improved risk disclosure, stress testing and capital requirements for high-carbon exposures can strengthen financial system resilience and facilitate the reallocation of capital towards low-emission sectors. Aligning domestic regulatory practices with international climate finance standards will be essential to mitigate systemic risks and ensure stability during the transition to a low-carbon economy.

Date: 2025-08-14
New Economics Papers: this item is included in nep-afr, nep-ene, nep-env and nep-ifn
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