French financial sector poorly accounts for climate risks, says Bank of France

Based on data from the end of 2017, a total of €862 billion in assets were exposed to the most carbon-intensive sectors, which comprised 12.2% of banks' outstandings and 9.5% of insurers' outstandings.

In a note published on Friday (25 October), the Bank of France noted that the risks associated with climate change are taken into account in a “partial and heterogeneous” manner by France’s financial institutions. EURACTIV’s partner La Tribune reports.

Beyond the crucial role of France’s financial sector in the shift towards more sustainable growth and the social responsibility of companies, the sector can also lead to a significant devaluation of certain assets.

But the sector has not yet fully grasped the implications of climate change, even though these cannot be ignored, said the Bank of France note published on Friday.

The French Prudential and Resolution Authority (ACPR), an independent administrative authority backed by the Bank of France, has indeed analysed the data of the banking and insurance institutions it supervises.

In particular, it is responsible for supervising the implementation of extra-financial reporting by insurers according to Article 173 of the country’s Energy Transition Law.

“Despite some progress, climate change is still partially and heterogeneously integrated into the risk management process of financial institutions,” Sébastien Diot and Anne-Lise Bontemps-Chanel summarised in the note.

But not all of them go at the same pace. There are so-called “advanced” institutions, generally the major international banking groups, as well as some “specialised” ones, which have integrated climate issues into their risk management.

And there are so-called “attentive” ones. These include retail banks, which are mostly operational in France but are nonetheless in arrears due to the lack of resources allocated internally to “problems that are not yet considered as priorities due to their lack of immediate materiality”.

And the ACPR does not list the names of companies for each category.

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Low exposure to physical risk

The ACPR also noted that “the assets of banks and insurers are not very exposed [to physical risk]” because they are located in areas that are not considered to be very vulnerable to climatic disasters. These are mostly in Europe, including in France.

Less than 2.5% of their assets are located in medium or highly vulnerable areas.

However, the ACPR noted that the information is “insufficiently detailed to fully assess the physical risk” and that only “non-life insurers and re-insurers have established, for the needs of their profession, very detailed measures for the location of insured persons and property”.

“Non-life insurers are, by the nature of their activities (in particular, by ensuring the allocation of insurance against damage caused by natural disasters), advanced when it comes to climate risk management with the regular use of severe stress tests,” the authors of the noted observed.

However, these tests have a very short lifespan, averaging five years, and the historical data for model calibration is probably partly obsolete due to climate change being in constant development.

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No impact scenarios for transition risk

On the other hand, the ACPR also noted that there is “more significant progress in the analysis of transition risk”, due to “allegedly more significant exposure”. Based on data from the end of 2017, a total of €862 billion in assets were exposed to the most carbon-intensive sectors, which comprised 12.2% of banks’ outstandings and 9.5% of insurers’ outstandings.

But even in this case, there is still room for improvement. The analysis of transition risk remained focused on credit risk and sometimes measured the financed carbon footprint, as well as sectoral sensitivity, but nothing more.

“Ultimately, these methods do not yet make it possible to quantify the impact of energy transition scenarios on bank balance sheets,” the note said.

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According to insurers, the analysis is more focused on market and allocation risk. All have implemented ratings based on environmental, social and governance (ESG) criteria to comply with article 173 of the Energy Transition Law, and some go so far as to assess the alignment of their portfolio with the 2-degree global warming trajectory.

“On the other hand, insurance companies do not assess the impact of valuation shocks on their portfolios,” the authors noted.

Another cause for concern is that the legal risk associated with climate change, the so-called “liability risk”, is “not perceived as potentially relevant” by French institutions.

“Now they are exposed to it,” the ACPR insisted.

They are directly exposed if they are criticised for financially contributing to highly polluting companies. And they are indirectly exposed because of the deteriorating credit risk of client companies condemned to pay damages, for example.

The ACPR recalled that it had launched work with local stakeholders to develop crisis scenarios.

The European Banking Authority must submit proposals by June 2021 to include climate change risks in stress tests to ensure that the capital held by banks is sufficient to cover the associated risks.

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[Edited by Zoran Radosavljevic]

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