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INTERVIEW: EU lead on climate risks positions BNP Paribas for U.S. regulation – chief sustainability officer

NEW YORK(Thomson Reuters Regulatory Intelligence) - Engagement with EU financial regulators who are taking a lead on climate risks and related disclosure issues has prepared BNP Paribas well for any new regulations to emerge in United States, the bank’s chief sustainability officer for the Americas said.

Smoke and steam billows from Belchatow Power Station, Europe's largest coal-fired power plant operated by PGE Group, at night near Belchatow, Poland December 5, 2018.

“There is a real need for a global shift from voluntary to mandatory disclosures; and we need them from all major corporates across all jurisdictions, as a way to provide transparency for lenders and investors,” BNP Paribas’s Hervé Duteil told Regulatory Intelligence, when asked about the bank’s expectations for U.S. regulation in a recent interview.

“The EU has been doing a lot of work on a taxonomy and has followed through with a robust body of regulations around sustainability disclosure and nonfinancial reporting for corporations as well as financial institutions and products. So, for us, quite honestly, ESG regulations are not new – even if it is a constantly evolving field where much more needs to be done, especially in terms of harmonization of standards and frameworks,” Duteil said.

U.S. regulators such as the Federal Reserve and the Securities and Exchange Commission have ramped up their efforts on climate change under the Biden administration. New rules are expected over the next year or so, but it is unclear what the fine print will look like and how banks should prepare. Many experts, however, argue that U.S. financial firms would be well-advised to look abroad at European regulators for a sense of what to expect(link: here).

Duteil pointed to the Federal Reserve’s formally joining the Network for Greening the Financial System (NGFS), a collective of 83 central banks, last year as a milestone in the development of U.S. and global regulations on climate risk.

While he could not speak for the intentions of U.S. financial regulators, Duteil said there was an “opportunity for the U.S. to engage and coordinate with foreign regulators and international standard setters to promote consistency in disclosures across borders to the maximum extent possible, but consistent with U.S. law and practice.”

BANK FINANCING OF FOSSIL FUEL EMITTERS

The financing of polluting industries, such as oil and gas, is becoming an increasingly important issue for bank shareholders, as lenders face scrutiny from governments, regulators and environmental campaigners.

Many face pressure from engaged investors and environmental activists to curb their lending to oil and gas companies. Such lending remains part of BNP Paribas’s credit portfolio, albeit down significantly from years ago, and is now only a small part of its overall commercial lending. In response to such pressures, Duteil said: “First of all, one has to understand that we are guided by what we think is right for society while supporting the good functioning of our global economies.”

“In that process, we not only do our own internal analysis but also listen to what all stakeholders have to say. For over a decade now, we have had intense dialogues with our clients, NGOs, scientists and experts in particular, on known and emerging sustainability issues, especially when developing our ESG policies,” he said.

Duteil pointed to a new study from the International Energy Agency (IEA), which he said provides an achievable pathway to reach net-zero greenhouse gas emissions by 2050(link: here), while ensuring stable and affordable energy supplies, universal energy access, and robust economic growth.

“The energy transition is an all-hands-on deck crisis,” he said. “The (IEA) report provides a narrow, but still achievable roadmap for the global energy sector – even if potentially highly disruptive for some incumbents.”

Duteil also highlighted the bank’s gradually restrictive policies around coal, which are designed to achieve a full exit of the entire value chain by 2030 in the OECD and Europe, and 2040 in the rest of the world.

However, the transition away from fossil fuel financing can be uneven. BNP Paribas, as with other global banks, has had its critics. The most recent came from the Rainforest Action Network (RAN), an environmental group, that highlighted BNP Paribas’s lending to the oil and gas sector in a report(link: here).

According to RAN, BNP Paribas stood out for the largest absolute increase in funding to fossil fuel companies among large banks in 2020, with a 41% annual rise to $41 billion. This was despite the French “bank’s strong policy commitments restricting financing for unconventional oil and gas,” RAN said.

In response to the report, the bank said that the COVID-19 health crisis in 2020 had a significant adverse impact on many of its corporate clients, including oil and gas, and that much of the financing provided to such companies was focused on liquidity needs.

“Such assistance has largely taken the form of a situational support to companies’ liquidity. It allowed avoiding severe financial difficulties to many industrial, retail and services groups in Europe and in the world, and played a major role in stabilizing the economy,” the bank said in a statement.

In addition, the financing needed to be viewed in context with the rest of its credit portfolio. “At this time when corporate needs have been totally atypical, our outstanding loan amount in the Oil and Gas sector grew by 4.1% compared to 6.5% for all sectors of the economy. By the end of 2020, BNP Paribas’ financing support to the Oil & Gas industry represented only 1.9% of the Group’s total loans,” the bank said.

CLIMATE SCENARIO ANALYSIS - PACTA METHODOLOGY

One of the tools used by large banks and regulators in analyzing the financial impact of bank lending and climate change is “climate scenario analysis.” This, according to the international Task Force on Climate Related Disclosures (TFCD), is a “well-established method for developing strategic plans that are more flexible or robust to a range of plausible future states.”

A recent innovation in climate scenario analysis is the development of an open-source toolkit to help banks analyze their loan books against the Paris Agreement Capital Transition Assessment (PACTA) methodology, and act to reduce the carbon footprint in their investments(link: here).

BNP Paribas partnered in late 2018 with four other European banks and an independent think-tank to develop the open-source methodology for aligning bank portfolios with the objectives of the Paris agreement. The PACTA methodology allows banks and investors to assess the alignment of the most carbon intensive sectors in their portfolios with the Paris accord.

“We basically forecast the trajectory of our credit exposure sector by sector over the next five years, in particular from what we know about our clients’ strategic and investment plans, as well as the implications of our own commitments,” Duteil said.

“We can also plot the distribution of our clients along that trajectory and identify those who are ahead of the curve, and those who are lagging. It is very helpful because we can then actively engage each of them in a strategic dialogue with regard to accelerating towards a carbon neutral future. We will soon publish the results of our assessment for two sectors -- utilities and oil and gas,” he added.

The toolkit has taken two years to develop and has been tested by 17 leading global banks from Europe and North and South America, including Barclays, BNP Paribas, Citi, Credit Suisse, and Santander. It was developed with input from banks, NGOs, and universities.

(Henry Engler, Regulatory Intelligence)

*To read more by the Thomson Reuters Regulatory Intelligence team click here: bit.ly/TR-RegIntel

This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on June 10. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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