THE GROUPE BPCE CLIMATE REPORT OCTOBER 2021

3 Risk Management

Outstanding loans to companies account for 27% of total credit exposure. Of these exposures, 13% concern companies in sectors most sensitive to transition risk such as the energy sector, including oil and gas, the basic industry sector, and mining and the manufacture of metals, a situation that necessarily implies a need to support these companies in their transition. Indeed, some of these companies have already started their transition; others are currently developing their alignment strategies or updating their business models. The identification difficulty resides in the fact that some companies pursue several activities at the same time, some of which are already aligned with environmental objectives, while other activities pursued by the same company still require major changes to be made in their production and/or manufacturing processes.

1.2 - Physical climate risks

‘Acute physical risks’ are defined as direct losses triggered by extreme weather events, whose induced damage may lead to the destruction of physical assets (real estate and/or production facilities) and provoke a collapse in local economic activities and, possibly, a disruption of value chains. ‘Chronic physical risks’ are direct losses triggered by longer-term changes in climate models (rise in sea levels, chronic heat waves, changes in precipitation patterns and increased fluctuations in these patterns, disappearance of certain resources) that can progressively weaken the productivity of a given industrial sector.

The Risk Department is developing a tool - known as Clim’Ap - designed to identify exposure of assets to physical climate risks. This tool makes it possible to assess the exposure of a geographical area to extreme climate events liable to impact the economic players in that area. By extension, it makes it easier to identify the degree to which Group customers are exposed to climate risks, leading to improved monitoring of the risks they face. Clim’Ap is designed to make a given territory’s exposure to any hazard visible at a fine level of granularity. An initial version has been developed to take account of the intersection of two risks: flooding and the swelling & shrinkage of clay-rich soils. The tool will also provide a clear vision of the vulnerability of economic assets in so-called ‘red’ zones (i.e. the most exposed zones) as well as the opportunities available in the territory under analysis. The tool is currently being developed with a view of extending the geographical scope and widening the range of the analysis to include other risks such as drought, hail, and late frosts.

Clim’Ap is a tool designed to identify the exposure of assets to physical climate risks.

 

1.3 - Mapping of climate-related risks

The materiality of climate change-related risks is assessed in terms of the major risk categories in Pillar 1 of Basel III, which are: credit risk, market risk, and operational risk, including non-compliance risks. Groupe BPCE has added other risks such as liquidity risk and reputation risk.

Climate is not a risk category in itself, but it affects financial and non-financial risks as defined in Pillar 1.

CREDIT AND COUNTERPARTY RISKS
  • Physical risks may affect customers located in areas sensitive to climate risks by weakening their profiles and increasing their probability of default. They may also affect Groupe BPCE by causing a decline in the value of assets held as collateral.
  • Transition risks arise directly from the Group’s exposure to sectors and counterparties whose business models are not based on the principles of a low-carbon economy. The challenges of the transition may disrupt these counterparties’ business activities, with an impact on their results or market share. This risk evolves notably in relation to consumer behavior and investor demands, the cost of raw materials, low-carbon innovations, or increasingly restrictive changes in the regulatory environment.
    For example, a significant portion of our outstanding loans is comprised of housing loans for which it is important to know the energy performance diagnosis in view of the constraints introduced by the so-called Climate & Resilience Act.