Insurers need to define climate risk management says French supervisor

Analysis based on reporting under France’s Article 173

A supervisory body that’s part of the Banque de France has said French insurers need to define their climate risk management strategies more precisely and use metrics to understand climate change risk and to develop a true forward-looking analysis.

These are some of the findings in two new reports analysing how French banks and insurers manage climate change risks, from the banking supervisor Authorité de contrôle prudential de resolution (ACPR), which operates under the auspices of the Banque de France.

The analyses are based on reporting under France’s Article 173, a comply-or-explain requirement for investors to report on their portfolios’ ESG integration, greenhouse gas emissions risks and contribution to a low carbon economy.

For the insurance sector, the ACPR says they need to define their climate risk management strategies more precisely and adapt their governance system to tackle the issue.

It also says insurers are expected to use metrics to understand climate change risks and use forward-looking scenarios. The ACPR says the adoption of a taxonomy to precisely define “green” assets will be helpful in evaluating the state of insurers’ portfolios on both the asset and the liability sides. The European Commission is currently designing an EU Taxonomy on Sustainable Finance.

For the French banking system, the ACPR says climate-related issues could be explicitly integrated into internal risk management frameworks. “The first step would be to develop risk mapping that would serve as a basis for regular monitoring of credit exposures,” says the ACPR.It also says that banks could make the collection of data needed to assess climate change-related risks systematic.

The reports also make recommendations for supervisors and regulators.

The ACPR says regulators must quickly agree on a robust, clear, detailed and consensual taxonomy of “green” and “brown” assets. Other recommendations for regulators include directly integrating climate risk into dialogue with banking institutions and the development of tools to identify climate change risks.

Overall, the ACPR says the main lessons from the two studies are that there is significant progress in the governance of climate change risks and the analysis of transition risk.

However, there is modest progress in the apprehension of the physical risk of climate change and that liability risk is not well analysed by French banking institutions and insurers.

The ACPR says as a result of the studies two working groups will be established with French institutions. The first one on the governance of climate-change related risks and the second one on risk metrics and scenarios analysis.

The work is part of a strategy by the Banque de France and the ACPR to protect its financial sector from detrimental effects of climate change and foster an orderly low-carbon transition.

The studies will also contribute to the work of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) launched by the Banque de France. The NGFS is meeting at the Banque de France next week where it will launch its first report.