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French banks, insurers face climate change scenario stress tests

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French banks, insurers face climate change scenario stress tests

France's financial regulator is set to push banks and insurers to do more to tackle climate change and associated risks, beyond changes prompted by a new law, including by introducing stress tests.

The country passed a law in 2015 designed to make the financial sector and publicly traded companies more accountable for sustainability, for example by requiring asset managers to report how they account for climate change when making investment decisions. Publicly traded companies must include climate change risks in their financial reporting.

"Since the introduction of the law on energy transition, which has helped French banks and insurers shape their strategies, we do see some progress, especially in "transition risks," but we think there is quite a bit of room for improvement," Laurent Clerc, director for Research and Risk Analysis at the Autorité de Contrôle Prudentiel et de Résolution, or ACPR, told a news conference in Paris.

The supervisor is planning to establish two working groups with French institutions in May, one to look at the governance of climate change risks and another looking at risk metrics and scenario analysis, he said. Working with financial firms, the supervisor will examine investment and lending portfolios to identify risks and measure their impact.

Stress tests

Climate change risks means taking a long-term approach to investment and lending of between 10 to 15 years — much longer than the usual two to three years for banks and five years for insurers. As a result, they will have to change how they manage their risk portfolios, he said.

The ACPR is also planning to subject banks and insurers to climate stress tests in the next two to three years, which will aim to look at scenario analysis. Insurers are already subject to natural catastrophe stress tests by the European Insurance and Occupational Pensions Authority, and French authorities are aiming to make the tests more stringent.

"That's the easiest part that people always think about, the most extreme risk," Patrick Montagner, the ACPR's deputy secretary general, told reporters. "Our idea is to go further than natural catastrophe scenarios; it's long-term risk."

Clerc said that while an increasing number of financial firms are starting to integrate climate change as a financial risk, others regard it as a purely reputational issue. Among insurers, 43% of France-based insurers have yet to define the risks related to climate change, he said.

Data issues

He also said there was a lack of granularity in the data, which made it difficult to ascertain exactly how a bank was investing its money.

Among six of France's largest banks, three actually increased their exposure to transition risk between 2015 and 2017 — that is to say, a greater proportion of their loan portfolios was exposed to changes in policy, law and technology connected to climate change.

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At the same time, Clerc said, the ACPR was unable to determine whether the banks were financing a renewable energy project, for example, on behalf of an oil and gas company because it only had sector data.

"One of the recommendations we are making for the future is to have a level of information that is much more granular," he said. "But it is not just up to the banks — it's the companies themselves which must be more precise about investments."

With regard to liability risk, meaning potential lawsuits related to climate change, Clerc said banks and insurers have yet to develop sufficient processes to deal with it, even though there are likely to be more and more climate change lawsuits.

He cited the example of the Urgenda case in the Netherlands. In 2015, a Dutch court ruled the country's government must cut its greenhouse gas emissions by at least 25% by the end of 2020 in a case brought by 886 Dutch citizens.