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Local banks’ ESG reporting risk

Garth Theunissen Investment Writer theunisseng@businesslive.co.za

PwC has cautioned SA’s banks that the credibility of their environmental, social and governance (ESG) reporting will come under increasing scrutiny as the world pushes businesses to combat climate change more proactively.

PwC has cautioned SA’s banks that the credibility of their environmental, social and governance (ESG) reporting will come under increasing scrutiny as the world pushes businesses to combat climate change more proactively.

While the global professional services firm praised SA’s banks for their resilience in the first half of 2021 it warned that the economy continued to face challenges that have been amplified by Covid-19. In its six-monthly analysis of SA lenders, PwC said the combined headline earnings of SA’s banks rose 177% in the first half of 2021 to R40.6bn when compared with the corresponding period the previous year. The sector’s combined return on equity rose to 15.4% in the first half of 2021, from 5.4% in the first six months of 2021.

Nevertheless, it said perceptions of value and risk were changing, with ESG issues taking a central place on the agendas of boards, investors, customers and regulators. Shifting dynamics in the market mean banks will need to go beyond mere reporting of climaterelated disclosures as investors are increasingly demanding a convincing ESG strategy that is accompanied by performance measurement indicators.

“We expect that banks will continue to refine their policies, their models and processes because they’ll have to measure what it means for them in terms of their numbers — profitability, capital, liquidity as well as brand and reputation,” Costa Natsas, PwC SA’s financial services industry leader, said during a briefing on the firm’s analysis of local banks. “There will be a lot more emphasis on reporting going forward as banks try to communicate their [ESG] story to the market.”

SA banks and asset managers are facing increasing pressure from investors and lobbyists to do more to combat climate change by ceasing their financing of carbon-intensive projects such as coal mines and oil pipelines. That leaves them grappling with the difficult Catch-22 situation of trying to balance the business imperative of delivering profits and returns with the sociopolitical need to promote sustainability.

PwC’s analysis of SA’s banks showed that nonperforming stage three loans increased 5.2% in the first half of 2021 when compared with the same period the previous year, though it said this largely reflected the migration of credit quality over time. Specific impairment coverage ratios increased to 44.5% in the first six months of 2021, up from 43.3% in the first half of 2020.

Even so, PwC said there were no significant changes in the composition of nonperforming loans across the major banks’ loan portfolios during the first half of 2021. The majority of nonperforming loans in terms of value still comprised mortgage loans with corporate lending the next biggest exposure.

PwC SA economist Lullu Krugel, who spoke at the presentation of the firm’s banking sector report, said she expected SA’s economy to expand at about 3% in 2021 and about 2% in 2022. However, she cautioned those numbers may be revised in October as her economic modelling methodology was updated to reflect the recent rebasing of GDP by Stats SA.

“We are in the process of still refining our models,” said Krugel. “Stats SA has provided information that the entire structure of the economy has changed … so we are completely revising our model. We have to do so before we put out our final forecast in October.”

THERE WILL BE A LOT MORE EMPHASIS ON REPORTING GOING FORWARD AS BANKS ... COMMUNICATE THEIR [ESG] STORY TO THE MARKET

Costa Natsas PwC SA financial services leader

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2021-09-20T07:00:00.0000000Z

2021-09-20T07:00:00.0000000Z

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