Risk Management

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.
 

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.

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:

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.