Taking account of climate-related risk

The adoption of the Paris Agreement by the 195 nations at the 2015 COP21 climate conference, recognising the need to limit global warming to below 2°C, has mobilised the financial industry to take better account of the threats posed to the sector by climate change. 

Speaking at a conference organised in late November 2015 on finance and the environment, the Governor of the Banque de France stressed the need for central banks and financial supervisors to heed the risks to financial stability associated with climate change.

Prior to this, the French Energy Transition Act of August 2015 introduced new regulations for the financial industry, obliging banks to include climate-related risks in their stress tests, and insurers to publish details of how social and environmental objectives are taken into account in their investment policies.

The Financial Stability Board has also set up a Task Force on Climate-related Financial Disclosure, comprising members of the financial industry. The group is due to finalise a report by late 2016/early 2017, setting out its recommendations on the financial information companies should publish to enable an assessment of their climate risks.

Expansion of the market for “green bonds”

Green bonds are debt securities issued by a company or public entity and designed to finance activities or projects of environmental benefit. The French market for green-labelled bonds is particularly dynamic: in 2015, it accounted for some 11% of total issuance of this type, and the record for the largest ever green bond issue is held by a French energy company, Engie (EUR 2.5 billion in 2014).

Aside from the benefits to issuers in terms of image, green bonds also help companies to attract long-term capital and diversify their investor base, and issues of this type are almost always oversubscribed. For investors, green bonds have the attraction of enabling them to finance the real economy and invest in sectors less likely to be affected by climate change. That said, they are not completely risk-free (e.g. risk of technological disruption to renewable energy sources, competition from fossil fuels), especially given the lack of incentive offered by current carbon prices. Green bond prices are also not particularly attractive for issuers.

A number of initiatives have been launched to try to develop the green bond market and limit its fragmentation, notably the European Commission’s Capital Markets Union, and the G20 Green Finance Study Group in which the Banque de France is participating.