Report: French banks highly exposed to transition risk

April 3, 2024|Written by Moriah Costa|Banque de France

French banks are highly exposed to climate transition risk while their securities and loan portfolios are not fully aligned with EU objectives, researchers at the Banque de France (BdF) have found.

Nearly 40% of French bank loans to non-financial corporations are highly exposed to transition risk, although the exposure drops when looking at the overall securities portfolios of insurance companies, banks and investment funds.

“The exposure of the French financial institutions’ portfolios to climate transition risks therefore appears substantial, particularly for banks with their large exposure to NFCs, but looks to be manageable in relation to their total assets,” the authors wrote.

In 2023, half of the securities portfolios of French financial institutions were invested in climate-related sectors. Banks invested mostly in construction, real estate and agricultural sectors, while investment funds and insurers were focused more on energy and transport.

Meanwhile, only 3% to 6% of French financial institutions’ securities portfolios are aligned with the EU taxonomy, which is consistent with the euro area as a whole. Still, the authors found that between 30% and 45% of non-financial corporation dedicated portfolios are invested in securities issued by companies that are deemed eligible by the taxonomy.

“Financial institutions therefore have significant scope of possibility to encourage companies, particularly through influencing strategies, to align their activities with EU transition objectives,” the authors say.

To help reduce the exposure of French financial institutions to climate risk as well as a disorderly transition, banks should utilise their relationship with borrowers, while investment funds can influence company decisions on climate policy and should increase their influence.

The financial sector needs to manage the risks and contribute to financing the transition to a low-carbon economy, which means that “funding for certain sectors, such as fossil fuel extraction, must be halted in favour of low-carbon emission activities, and all businesses must be encouraged to implement coherent transition plans”.

An estimated €813bn is needed each year to achieve the EU’s goal of reducing emissions by 55% by 2030 but the EU currently has a climate investment deficit of €407bn in 2022, according to research by the Institute for Climate Economics.

Last year, the BdF pledged to align its investment portfolio with the Paris Agreement by the end of 2024 and has taken a strong stance on climate change being a core issue for central banks. France came top of the most recent Green Central Banking Scorecard, receiving a B- due to its efforts in research and advocacy, and leading by example.

This page was last updated April 3, 2024

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