In a speech by Denis Beau, first deputy governor of the Bank of France, he stressed “how immensely important it is, from my perspective as a central banker and supervisor tasked with ensuring financial stability, that we standardize non-financial information, especially climate-related information.”
The materiality of climate-related financial risks, together with their potential reach, can trigger financial instability with systemic consequences. These risks have been clearly established and substantiated, as shown by the Financial Stability Board’s recent report entitled “The implications of climate change for financial stability“. Beau draws two conclusions from this work, conducted within the FSB by a group of experts and which he directs.
- The huge variability and potential severity of the expected financial impacts, depending on the trajectory of the temperature rise and the adaptation measures implemented.
- The threat of a brutal and unexpected materialization of physical and transition risks, the effects of which could be amplified and widely disseminated, notably due to interactions between physical and transition risks and the pro-cyclical behavior on the part of financial intermediaries, consisting in a reduction in banks’ supply of credit or in the coverage of insurance risks.
Central banks and supervisors, among them the Banque de France and ACPR (French Prudential Supervision and Resolution Authority), have made a strong commitment to ensuring that financial intermediaries – first among them banks and insurers – take better account of climate-related financial risks.
In France, the ACPR in May published a guide to good practices in governance and climate risk management for the banking industry. Also this year, it launched a pilot climate stress test exercise. This exercise is set to be made permanent and extended in scope, as the SSM (Single Supervisory Mechanism) recently announced its intention, as of 2022, to carry out climate stress tests on all institutions under its supervision.
Finally, the ACPR’s Climate and Sustainable Finance Consultative Commission, in partnership with the Autorité des Marchés Financiers (AMF), has conducted a review of French banks and insurers’ climate-related commitments and will publish its findings in the next few days.
But at the present time, the public disclosure of non-financial information is neither developed nor standardized enough to ensure that the physical and transition risks to which financial institutions are exposed are adequately identified. This constitutes a genuine obstacle, both for financial institutions in the implementation of their commitments and for supervisors seeking to monitor those commitments, as well as to measure exposures to climate-related risks and carry out stress tests.
At the European level, recent advances have put in place the necessary foundations – notably with the NFRD (non-financial reporting directive) and the European taxonomy of activities. France, he said, had already taken a slight lead on this, with the introduction in 2015 of disclosure requirements for climate-related risks, under Article 173 of the Law on the energy transition (the implementation of which illustrated the need to harmonize published data), which has since been recast under Article 29 of the new Energy and Climate Law.
But climate-related risk is a global risk, which requires concerted action and internationally comparable data. As a result, there needs to be put in place a coherent conceptual framework at the global level, but without preventing those jurisdictions who have made a head start on this from going further and faster. He commended, in this regard, the European efforts towards the standardization of non-financial information, in particular thanks to the work of EFRAG (European Financial Reporting Advisory Group) and the work that the IFRS (International Financial Reporting Standards) Foundation plans to carry out on this issue.
Beau added that data transparency and harmonization are vital to properly identify exposures, but the very nature of climate-related risk means taking a forward-looking approach. The disclosure of standardized non-financial information will have the added advantage of making it easier to conduct forward-looking assessments of banks and insurers’ risks, by modeling the impact of different climate scenarios on their respective exposures.
But in order to obtain comparable results, coherent scenarios need to be a starting point. Hence the importance of the benchmark scenarios used in the pilot exercise this year, which were developed by the NGFS (Network for Greening the Financial System), the network of central banks and supervisors in which the Banque de France and ACPR play a pivotal role, and which sets the standard for international regulators.