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Banks see climate change as full-blown financial risk, says SocGen deputy CEO

Banks regard climate change as a full-blown financial risk in part because of their potential exposure to stranded assets, according to Philippe Heim, deputy CEO of French bank Société Générale SA.

Heim said lenders were becoming increasingly aware of the impact climate change might have on their books and were not just looking at physical risks, which include extreme weather.

"Climate risk is seen now as a real financial risk first and foremost, not only physical risks but also true financial risks through, for example, stranded assets," he said at a conference in Paris on July 9, referring to businesses or industries that will become obsolete, potentially leaving worthless assets on banks' balance sheets.

Paris Agreement

As a result, the French bank has been changing its financing policies to comply with the Paris Agreement on climate change, which aims to limit global warming ideally to 1.5 degrees C above pre-industrial levels, and to 2 degrees C more at the most.

SocGen no longer finances new coal financial projects, and its exposure to coal is now less than 20% in all its energy projects, Heim told the conference.

READ: Central banks must include climate risk in asset values - Bank of France

Like many of its European peers, the bank is financing €100 billion by 2020 in green bond projects or renewable energy to help it reach the Paris climate goals. Some of this money is going to project financing, for example in a joint project with the World Bank's financing arm International Finance Corp. to build a power plant in Cameroon, which will provide 30% of the country's electricity needs.

It is also raising money for green projects through crowdfunding following its acquisition of the financial technology company Lumo in June 2018, he said.

On July 10, the bank issued a €1 billion 10-year fixed rate "green" covered bond, oversubscribed by 2.5 times. The funds will be used to refinance home loans granted for carbon-efficient buildings.

While sustainable finance should "become the norm," he said there was a lack of "common language" between banks over how they should plan for climate change.

New taxonomy

However, the EU's recently proposed taxonomy, which is designed to be a reference for projects and sectors on how they should invest in climate change, should provide a base for banks, he added.

Changing banking regulations will also be a challenge for the sector in meeting its climate change, he said.

European banks will need to hold more capital to comply with the capital requirements of incoming global banking rules under the Basel III accords. Heim said banks may need to hold more capital for project finance under the new rules, which could hamper their ability to finance green projects. He called on a green supporting factor , or lower capital requirements for financing sustainable projects such as solar power or wind farms. The European Commission has been considering the idea under its sustainable finance action plan, which incorporates the taxonomy.

Supervisors and regulators are increasingly looking at introducing climate stress tests for banks to push them to do more on climate change, and Heim said he welcomed the idea as it would show how banks are exposed to physical risks or transition risks — which include policy changes — raise awareness and provide transparency.