Climate risk: a major issue for banks in 2021


At the end of 2020, the European Central Bank (ECB) communicated the final version of the guide relating to climate and environmental risk. This year, banks are required to “self-assess in relation to the prudential management defined in this guide” and assess their exposure to these risks.

Marc Carney, the former Governor of the Bank of England was the first financier to put forward the idea that climate change threatened global financial stability when he sat in the United Nations as special envoy for action climate and finance: “Communication on climate risk must be complete, climate risk management must be transformed and the search for a” net-zero “world must be generalized” he had declared.

The 2015 Paris Agreements, which provide for limiting global warming on the planet to 1.5 ° C by 2050 and the significant reduction in greenhouse gas (GHG) emissions in order to achieve the objective of carbon neutrality , kick-started a gradual transformation of companies towards a more environmentally friendly business model.

Following a public consultation, the ECB published the final version of the guide on climate and environmental risks, with the objective of “ safe and prudent management of these risks within the current prudential framework “. The report underlines the need for transparency and the importance of integrating climate risk at the heart of governance. In its press release, the ECB “will ask banks to self-assess against the prudential expectations defined in the guide”.

Measure the climate impact in the credit granting process and in risk management

Banks will have to both integrate climate risk into the rules for granting credit, but also identify and measure the share of climate risk among the existing risks as part of the prudential approach to calculating capital.

Banking institutions are in fact indirectly confronted with 2 major risks: the physical risk, linked to chronic phenomena such as the loss of biodiversity or deforestation, but also to temporary phenomena such as episodes of flooding or drought. Transition risk refers to the loss generated directly or indirectly by exposure to carbon assets. This risk is, for example, linked to the sudden adaptation to policies in favor of ecological transition, to technological progress and to the increased sensitivity of public opinion for sustainable finance.

Banks face several obstacles in assessing these risks: the lack of reliable indicators, relevant and abundant historical data, as well as the difficulty in predicting the evolution of long-term climate risk and the consequences on the market. real economy.

Integration of climate risk into regulatory stress test exercises

In addition, climatic resistance tests will be made mandatory and will have to be integrated into the current stress test exercises for 2022, and whose outlines will be known this year. The Prudential Control and Resolution Authority (ACPR), launched last year a stress test exercise on an experimental basis and on a voluntary basis, in which some banks took part. The Network of Central Banks for the Greening of the Financial System (NGFS) has developed certain hypotheses relating to projection scenarios towards a low-carbon economy, which constitutes a starting point common to all the banks in carrying out climate stress test exercises.

Given the regulatory pressure and a growing awareness of part of the population for ecological issues, 2021 is a pivotal year for banking institutions. Beyond the duty of transparency, it is also the resilience capacity of the banking model that is at stake.