N° 101 : French banking groups facing climate change-related risks

To answer these questions, the ACPR sent a new questionnaire to the main French banking groups during the summer of 2018 and subsequently organised bilateral interviews from September to November 2018. This survey helped to draw an appraisal of progress achieved by banks since the publication of a report to the government in March 2017, which dealt with practices of the banking sector in managing risks related to climate change.

This “Analysis and synthesis” displays our main findings. It also specifies the risks to which banking groups are exposed.

The publication is organised around the following issues:

• Are climate change-related risks included in the strategic orientations of French banking groups? Are these strategies compatible with the Paris Agreement and the National Low-Carbon Strategy? Are decision-making bodies regularly kept informed? What are the metrics used for strategic steering, the possible setting of objectives and the operational modalities?

• Are climate change-related risks considered as a new class of risks or do they represent factors influencing the traditional categories of prudential risks (credit, market, liquidity, etc.)? What are the risks to which banks are exposed and how do they address in particular physical risks, transition risks and liability risks associated with climate change? What progress has been achieved since 2016 and what are the innovative approaches developed by institutions to manage these risks? Where do institutions stand regarding the possibility of conducting climate stress tests?

The main observations can be summarized as follows:

• In general, there is progress in addressing climate risk at the level of the group strategy, some of which are associated with divestment commitments to some industries with high greenhouse gas emissions. Some institutions, characterised as “advanced” in this study, started developing certain metrics to steer progressive “decarbonation” of their portfolios. Reference is often made to the Paris Agreement even though an alignment of the group strategies to the 2°C Global Temperature Target is not always explicit or operational. In addition, institutions barely refer to the National Low-Carbon Strategy.

• Previously, climate risk was principally a concern only for the CSR function within banking groups, mainly from a reputational risk perspective. However, there is today a growing recognition of climate change-related risks by risk management functions, underlining the fact that these issues are now considered beyond the CSR function. This evolution is reflected in some institutions by an increasing quantification of risks and exposures and early sensitivity analyses of portfolios.

With regard to the three main categories of climatic-change related risks, one can note:

• Physical risk. Banking groups appear to have relatively little exposure to physical risk on the basis of currently available scenarios and expected impacts, as exposures are mainly concentrated in low-vulnerability geographical areas. However, the industry seems to be more aware that the full risk is not necessarily and fully transferable to the insurance sector. Nonetheless, the available examples of extreme episodes show that the latter did not lead to material consequences on banking risks. Progress is still necessary with respect to the granularity of data collected on the location of exposures and the difficulties, associated in particular with the organisation of information systems, to consolidate this information at the group level. Physical risk should not indeed be underestimated, even though its horizon of materialisation is generally foreseen in the medium term (10-15 years). For example, the rivers’ low water level in Europe during the 2018 summer, especially the Rhine, disrupted river transport and supplies in Germany or Switzerland. From a more general view, the already observed effects of climate change on infrastructure or the environment are also new risk factors for the financial position of governments.

• Transition risk. Achieved progress in this area was more significant as banking institutions consider themselves being more directly exposed to this risk. However, this trend is unevenly distributed across banking groups. Based on data submitted by banks, we observe a reduction in exposure to sectors which are the biggest emitters of greenhouse gases between 2015 and 2017. Nevertheless there is no evidence that this decline is systematic and will be lasting. At the same time, supervisory data related to large exposures monitoring, which are available through 2018, exhibits a stabilisation, even in some cases a slight increase in exposures. Institutions underlined that the horizon for transition risk is much closer to the one underlying their strategic thinking. Despite their uncertainty, this is in line with climate scenarios which imply carbon neutrality to be achieved between 2030 and 2050 in order to comply with the Paris Agreement objective. Institutions also consider the main source of materialisation of transition risk to be the implementation of credible public policies (energy tax). However, they do not seem to consider that an adjustment could occur through an endogenous and abrupt correction in financial markets. In this area, room for progress is therefore also considerable and supervisors, through sensitivity or stress testing exercises, could serve as catalyst.

• Liability risk. Most of respondents consider not to be exposed to this risk in a material manner. However, the number of litigations is increasing at the international level and institutions can only be encouraged to seize this topic.

This paper concludes with a number of recommendations to regulators and supervisors on the one hand, and banking institutions on the other hand, to encourage the diffusion of best practices and a better consideration of climate change-related risks.