Risk Management

Management of climate-related risks at the Banque de France and the ACPR: risks to our balance sheet and risks to our missions

In accordance with the strategy described in the previous chapter, the Banque de France seeks to assess and manage the impact of climate-related risks on both its balance sheet and its missions.
 

The inclusion of climate-related risks in monetary policy at Eurosystem level is a central plank of this approach, not just because of the impact of climate change on price stability, but also because of the share of the Eurosystem balance sheet represented by monetary policy portfolios. The ECB's monetary policy strategy review, which wrapped up in July 2021, and the implementation of the goals of the shared climate action plan, seek to improve recognition of the impact of climate change and the low-carbon transition on our price stability mission and its operational application. Meanwhile, climate stress testing will enable the Eurosystem to measure its own exposure to climate change risks more effectively.
 

In non-monetary policy portfolios, the Banque de France began applying a responsible investment approach to its own funds and pension liabilities portfolios in 2018. As such, it monitors and manages the climate-related risks to which these portfolios are exposed. In accordance with the common stance adopted by Eurosystem central banks, the Banque de France will shortly adopt a climate reporting approach covering all euro-denominated non-monetary policy portfolios.
 

In its capacity as supervisor, the ACPR acted early to identify climate change risks, conducting its first pilot climate exercise in 2020. This approach is now being taken forward within a European framework, including through an exercise by the SSM in 2022. Coupled with efforts to monitor and assess the climate commitments of members of the financial community, these measures aim to encourage better recognition of climate-related risks by the French banking and insurance sectors.

Management of climate-related risks at the Banque de France: monetary policy portfolios

ECB monetary policy strategy review

Euro area monetary policy is determined by the Governing Council of the ECB and implemented jointly on a decentralised basis by the ECB and national central banks. Following a strategy review, on 8 July 2021 the ECB adopted and published its new monetary policy strategy, which included a climate action plan. Acting within the framework of the ECB's mandate, the Governing Council committed itself to considering all the implications of climate change and the low-carbon transition in its monetary policy and central banking tasks.
 

After making a major contribution to the strategy review that ended in July 2021, the Banque de France is continuing to play a driving role within the Eurosystem in implementing the objectives of the shared climate action plan. The Building 2024 Together corporate plan links Eurosystem objectives to those of the Banque de France via Action 3.
 

On 4 July 2022, the ECB communicated on concrete steps taken to consider climate change in its corporate bond purchases, collateral system, reporting requirements and risk management.
 

Find out more…
 

…about the European Central Bank's new monetary policy strategy: https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708~dc78cc4b0d.en.html
 

…about the inclusion of climate questions in the new monetary policy strategy:  https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html
 

…about the July 2022 decision on monetary policy operations: https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220704~4f48a72462.en.html

 

Efforts to green the Eurosystem's monetary portfolios
 

Drawing on its experience with the responsible investment policy for non-monetary policy portfolios, the Bank is contributing to work by the Eurosystem on ways of greening monetary policy portfolios comprising corporate bonds (CSPP).
 

The Eurosystem wants to gradually decarbonise its corporate bond holdings, on a path aligned with the goals of the Paris Agreement. To this end, it will tilt these portfolios towards issuers reporting better climate performance by reinvesting the redemptions expected over the coming years. Better climate performance will be characterised by lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures.
 

Tilting means that the share of assets on the Eurosystem’s balance sheet issued by companies with a better climate performance will be increased compared to that by companies with a poorer climate performance. This aims to mitigate climate-related financial risks on the Eurosystem balance sheet. It also provides incentives to issuers to improve their disclosures and reduce their carbon emissions in the future.
 

The ECB expects these measures to apply from October 2022. The ECB will start publishing climate-related information on corporate bond holdings regularly as of the first quarter of 2023.
 

In any case, the volume of corporate bond purchases will continue to be determined solely by monetary policy considerations and their role in achieving the ECB’s inflation target.
 

The ECB is conducting climate stress tests of the Eurosystem balance sheet in 2022 to assess the Eurosystem’s risk exposure to climate change, leveraging on the methodology of the ECB’s economy-wide climate stress test. Drawing on experience gained in adapting the ACPR’s pilot exercise, the Banque de France took part in the Eurosystem's work to determine the methodology. The ECB is scheduled to release the initial aggregate results in early 2023.

 

Find out more…

…about the ECB’s policy to decarbonise its corporate bond holdings: https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220919~fae53c59bd.en.html

Management of climate-related risks at the Banque de France: non-monetary policy portfolios

Climate-related risks to the Banque de France balance sheet are integrated in our overall risk management approach

The Risk Committee determines and monitors the risk oversight framework for the Banque de France’s own-risk market operations (see footnote). The Operations Risk and Compliance Directorate, which is in charge of the secretariat for this committee, ensures that the framework is implemented. The Risk Director sits on the Assets-Liabilities Committee, the Pension Plan Strategic Committee and the Investment Committees, ensuring that risks are effectively taken into account in strategic and tactical investment decisions.
 

Acting on the fact that climate risk is a factor in financial risk, the Risk Committee requires this risk to be incorporated in the assessment and analysis of credit and market risks relating to operations. Since 2021, the committee has devoted at least one of its annual meetings entirely to climate risk. For example, in 2021, the Risk Committee held a specific meeting on taking climate risks into account in the Bank's risk management system, with a view to strengthening the integration and monitoring of these risks in the portfolios of assets managed for own account (non-monetary policy). The Risk Committee also reviewed the methodology and results of the first round of climate stress tests conducted in 2021.
 

Footnote: The Governing Council has responsibility for the financial risks associated with monetary policy instruments, which are shared between Eurosystem members. Operational and cybersecurity risks are subject to specific governance arrangements.

 

Responsible investment policy

The Banque de France has pursued a responsible investment (RI) approach since 2018. It first adopted an RI Charter, followed by a three-pronged strategy covering climate issues, environmental, social and governance (ESG) questions more generally, and engagement with companies in which it is a shareholder. This approach covers the own funds and pension liabilities investment portfolios, i.e. assets for which the Banque de France is solely and fully responsible. These portfolios were worth EUR 23 billion at 30 November 2021.
 

The Banque de France's responsible investment strategy involves monitoring and steering the climate risks (physical and transition risks) to which the asset portfolios are exposed (see Pillar 1 below). Physical risks, such as heat stress, are measured using a composite forward-looking indicator covering sovereign issuers and the entire value chain of portfolio companies. Exposure to transition risk is measured based on the share of revenue that portfolio companies derive from fossil fuels. In addition, the responsible investment strategy is integrated in the three lines of defence of the Banque de France's risk management system. As part of this, all listed and unlisted vehicles in which the Bank invests are submitted for approval to the Risk Committee.
 

Find out more…

...about the Banque de France’s responsible investment strategy: https://publications.banque-france.fr/en/liste-chronologique/responsible-investment-report

Management of climate-related risks at the Banque de France and ACPR: As supervisor, ensure the stability of the financial centre

Early steps to identify climate-related risks

The ACPR’s work on climate risk began in 2015 in the context of implementing France’s Environmental Transition and Green Growth Act, which established a strict extra-financial disclosure framework for institutional investors. Following the publication of two initial reports in 2019 on the exposure of banks and insurers to climate risk, two task forces were set up with the industry to look at climate risk governance and scenario analysis. This led to the release of two best practice guides on climate risk governance and management for banks (2020) and insurers (2022). Work on scenarios paved the way for a pilot exercise of climate scenario analysis. The first of its kind and scale, the exercise was conducted in the two sectors and drew on the initial scenarios published by the NGFS.
 

Follow-up on the pilot climate exercise

In 2020, the ACPR organised a pilot climate exercise, which functioned as a stress test of climate-related financial risks through to 2050. The findings were published in May 2021. The ACPR teamed up with 9 banking groups and 15 insurers, representing 85% and 75% respectively of the French market, to stage a full-scale and stringent assessment of climate-related risks. This exercise illustrates the driving role played by France’s authorities and the Paris financial community, as well as the progress made in efforts to stop global warming since 2015.
 

The pilot exercise found French banks and insurers to be moderately exposed overall to climate-related risks. But considerable efforts are still needed to help to significantly reduce greenhouse gas emissions by 2050 and thus contain the temperature trajectory between now and the end of the century.
 

The exercise was innovative in a number of ways, including its application to the two sectors (banking and insurance), its attempt to assess interactions through risk transfer mechanisms, in its degree of geographical and sector granularity, and in the dynamic balance sheet assumptions used to assess the strategies of individual institutions. To date, it is the only exercise that has also integrated the health risks linked to global warming. This exercise had a galvanising effect on French financial institutions and was a major influence on the work of other supervisors, including the ECB.

 

The innovations of ACPR pilot climate exercise:

Short-term, medium-term and long-term risk assessment horizon

Innovative methodologies (scenario analysis applied at sector level)

Innovative assumptions (dynamic balance sheet in particular)

Coverage of physical and transition risks

Common risk assessment assumptions used by participating institutions

 

Beyond the methodological findings, two key risk-related takeaways:

  1. Vulnerabilities associated with physical risk are far from insignificant: based on information provided by insurers, the cost of claims could increase by between five and six times in some French départements between 2020 and 2050;
     
  2. Financial institutions were able to assess corrective actions (exits from some sectors, for example) and take note of new risks: potential mismatch between exit strategies for certain GHG-emitting activities and the goal of maintaining market share, financing the economy or maintaining customer relationships, potentially resulting in longer-than-expected exposure to transition or physical risks.

 

Pan-European stress tests

In January 2022, the ECB announced the launch of a prudential stress test covering climate risk, to assess banks’ readiness to withstand the economic and financial shocks that these risks could trigger.
 

The Banque de France and the ACPR made a significant contribution to efforts to prepare this cross-European exercise, providing the SSM with the experience gained at national level.

 

 

 

Joint ACPR-AMF report on monitoring and assessing the climate commitments of members of the financial centre

Working through their respective Climate and Sustainable Finance Commissions, the ACPR and the AMF published three joint reports, in 2020, 2021 and 2022, based on publicly available information and questionnaires sent to key players in the Paris financial community, supplemented by numerous bilateral exchanges and analyses using internal data held by the two authorities.
 


 

Regarding the exposure of financial institutions to fossil fuels, the authorities believe that institutions need to work harder to recognise these exposures more robustly, transparently and uniformly, and that efforts should be concentrated in the first place on capturing the entire value chain and the widest possible business scope.
 

The ACPR and AMF also said that financial institutions should do more to establish formal customer support and shareholder engagement policies, and that the impact of employee training should be more clearly detailed or assessed.
 

The most recent joint report, which was published in late October 2022, also found that previously noted efforts have stalled. The authorities therefore called on financial institutions to act swiftly to close the gap between the currently observed level of transparency on voluntary engagements and the requirements arising from regulations currently being applied or still to come.

 

Check out the interactive table of contents

Updated on: 11/30/2022 10:39