Will BNP Paribas have to defend itself before the judges? A few months ago now, the main French bank was given formal notice by three NGOs (Oxfam, Notre Affaire à tous and Les Amis de la Terre) under its duty of vigilance, the organizations demanding the end of its investments in new fossil fuel exploration projects. While the formal notice expired on Thursday January 26, the French banking group reacted by setting a new trajectory to reduce its exposure to fossil fuels, with the objective of reducing its outstandings on extraction and gas production, and up to 80% on oil by 2030. The future will tell if this will be enough to avoid a complaint. It is in any case a measure which will reduce, if the promise is kept, its exposure to the famous risk of transition. A data still little known to the general public, but which is now on the agenda of many banks and financial organizations.
To put it simply, transition risks correspond to the financial impact for an organization of a transformation of society towards a low-carbon economy. In a world which, in order to respect its climate commitments, must eliminate the consumption of fossil fuels, the value of the latter tends logically towards zero. However, a bank holding investments linked to these energies in its portfolio automatically exposes itself to this financial risk. The question is already to know the extent of the damage. This is the task tackled by the One to One campaign, led in Europe by several NGOs including Finance Watch. Its conclusions published on January 12 are relatively worrying. The study shows that global financial institutions are expected to hold around €2 trillion in risky fossil fuel assets by 2030. If the fossil fuel bubble burst that year, banks would the study needs a €4.6 trillion bailout.
In addition to this transition risk, there is also a so-called physical risk. The effects of global warming (droughts, floods, fires), which continue to materialize all over the world, have a profound impact on economic activity and, by capillarity, on that of banks. “Like the Covid crisis, you have a destabilizing effect on the economy as a whole. It will not only be the coastal areas that will be affected. When all this accumulates, it leads to gigantic decreases in terms of GDP,” said Benoit Lallemand, secretary general of Finance Watch.
If the physical risk is already materializing, it remains to be seen when the transition risk will respond to it. And so when these fossil assets held by banks will no longer be worth much. While stocks linked to coal, oil and gas have regained strength in recent months, nothing says that the current energy crisis will not cause an electroshock in the world concert of nations aiming for an accelerated weaning. For the One to One campaign, a collapse similar to the 2008 financial crisis is possible. NGOs estimate the potential job losses at 3.7 million, or almost 2% of the European working population.
To cover themselves against this eventuality, the NGOs are calling on the banks to provide greater risk coverage, in particular by increasing their own funds. The idea is relatively simple. When a bank makes a loan of 100,000 euros to a lambda company, the current rules require it to have 8,000 euros of equity. Finance Watch et al.’s proposal tends to apply a risk premium of 150% for investments in existing fossil energy projects (fields already drilled or in production), which amounts to moving from an equity guarantee of 8,000 to 12,000 euros. For investments related to the exploration and production of new fossil fuels or the expansion of fossil fuel reserves, Finance Watch even suggests a risk factor of 1,250%, i.e. $1 held in funds banks’ equity for every dollar invested.
In the European institutions, a big battle between the banking lobbies and the NGOs as well as certain deputies takes place precisely on this subject. Last week, an amendment tabled a few months ago in the direction of strengthening capital was examined by a committee of Parliament. Supported by several MEPs such as the Social Democrats Aurore Lalucq and Paul Tang (Socialists and Democrats), as well as in the center by deputies such as Gilles Boyer or Pascal Canfin (Renaissance), he was challenged. “The Conservatives are following the line of the banking lobby, which is reluctant to increase its equity by pointing out the unbearable risk of losing competitiveness”, laments Benoit Lallemand.
The latter, however, recalls that with the recent rise in the key rates of the European Central Bank, commercial banks have been making some great somersaults in recent weeks. The refinancing rate, which remunerates the compulsory reserves deposited by commercial banks with it, rose to 2% in December. In a study published on the Vox site, the economist Paul de Grauwe estimates that this will represent 92 billion profits for the banks in 2023. “As a reminder, our estimate of the capital necessary for European banks to adequately cover their climate risk linked to their exposure to the existing fossil industry (excluding known reserve expansion activities) is 34 billion”, indicates Benoit Lallemand, who stresses that the subject will come back on the table in the next twelve months. A matter of big money, and a battle for influence which is not likely to end anytime soon within the European institutions.
