Since 2015 and the Climate Change Conference in Paris (COP21), the financial sector has been subject to special attention from the legislator, which has strengthened the connection between financial and climate-related issues. In particular, this is reflected in increased regulatory changes applicable to sustainable finance, such as the TCFD (Task Force on Climate-related Financial Disclosures) initiative mandated by the Financial Security Board on transparency recommendations with respect to investors, and the European Commission’s action plan on sustainable finance.
In light of the acceleration of climate change, underscored in the most recent report by the Intergovernmental Panel on Climate Change (IPCC), and as announced in the Katowice Commitment with four other banks during the COP 24 in Poland , Societe Generale shares the goal set out in the Paris Agreement to require financial flows to be in line with “a trend towards lower greenhouse gas emissions and greater resilience to climate change”.
As from 2015, Societe Generale has committed to strive to put the Bank’s action on course to achieve the scenario whereby global warming is limited to 2°C by 2020. With this commitment, the Group aims to implement governance, risk management and risk monitoring tools to enable it to respond in the most appropriate way to a carbon-free economy resilient to the effects of climate change.
In so doing, the Group seeks to position itself as one of the key players in the fight against climate change, by supporting clients with their energy transition and promoting sustainable development in Africa: two major collective challenges to which Societe Generale can and wants to contribute.
The climate strategy has thus been structured around risk management and opportunities related to climate change, as well as managing the climate impact of the Group’s proprietary activities.
A governance framework set via climate related risk management
Risks associated with climate change do not represent a new risk category, but rather an aggravating factor for the types of risks already existing in the Bank’s risk management system (credit and operational risks, risk related to insurance activities, etc.).
Since 2017, CORISQ (a General Management Committee that defines the Group’s risk strategy) has been informed about the risks associated with climate change. In defining credit risk appetite, CORISQ relies on the expertise of the CSR Department, which issues an opinion on environmental challenges for the business sectors concerned (for example the oil and gas sector, renewable energies, or the automotive sector).
In 2017, a mechanism for measuring the impact of a scenario related to the materialisation of climate change-related risks was integrated into the risk mapping presented to the Board of Directors’ Risk Committee.
The Climate CORISQ meeting of October 2018 strengthened governance with a view to increasing the credit risk management capacity in the appropriation of climate challenges. This same Committee has set itself the goal of:
- defining and maintaining benchmark scenarios, and has gradually been integrating a climate vulnerability assessment for each client in the sectors sensitive to transition risks;
- approving credit policy guidelines for portfolios sensitive to environmental challenges and policies that do not have dedicated supervision.
Risk management and the seizing of climate opportunities
In terms of opportunities for the Bank, with respect to supporting the growth of certain clients, plans to improve production facilities or energy transport (such as transport/mobility infrastructures), the Group has prompted the deployment of expertise in several segments. The result is leading commercial positions.
In 2018, Societe Generale extended its scope of intervention with the acquisition of the French Fintech Lumo, a pioneering crowdfunding platform dedicated to renewable energies. Since its creation, Lumo has collected funds from thousands of individual investors for the benefit of some 40 wind, photovoltaic and hydraulic energy projects that will produce more than 260 million kWh of green electricity every year, equal to the annual consumption of nearly 100,000 households.
With this acquisition, the Bank has strengthened its ability to serve its major energy clients by offering them a crowdfunding solution to develop their projects, as required by the French government's Renewable Energy Liberation Plan, which is part of the Climate Plan.
Evaluation of transition risks
The approach adopted to measure the additional credit risk due to the transition risk corresponds to a vulnerability indicator defined during the annual renewal of internal ratings. The quantification method is inspired by that developed by the United Nations Environment Programme Finance Initiative (UNEP-FI), to which Societe Generale has contributed alongside 15 international banks.
A 2040 scenario analysis was conducted on the lending portfolio under an assumption of the identical extension of the loans and the non-adaptation of borrowers. The impact of a 2°C transition scenario compared with a scenario of no transition measures shows a low impact overall, but a concentrated impact on segments producing particularly high carbon emissions. These results are in line with those shared with other European and American banks.
The Group plans to roll out the assessment of the “climate vulnerability” indicator for clients in the following sectors: oil and gas, metals and mining, electric utilities, and transport. When a client is identified as vulnerable, the client relations manager must issue an opinion on the client’s ability to reduce this vulnerability.
Evaluation of physical risks
The Group also participated in works by the UNEP-FI to identify “physical” climate change risks . Contrary to transition risks, the methodology is not sufficiently developed to enable a valuation. However, it does shed light on the risk transfer mechanisms, distinguishing between extreme situations (tornadoes, floods, droughts) and incremental changes (rising sea levels, riverbank erosion, rising average temperatures).
This work on physical risks must be continued by improving our knowledge of the location of third-party clients’ assets and, ideally, their reliance on suppliers located in exposed regions (for example, South East Asia) or on at-risk commercial routes (ports, change of maritime routes). Societe Generale is continuing its methodological research.
For further informations:
Identification of physical climate change risks by UNEP-FI
Other climate change-related risks
The Group also has systems in place to manage other risks. This includes operational risks: compliance risks and liquidity risks incurred by climate risks, physical risks for branches, and E&S-related reputational risks.
Sector policies also play a role in controlling these risks.
Aligning the main climate-related sectors with a 2°C trajectory
To achieve this ambition, the Group is developing methodologies and tools measuring its lending portfolio's alignment with the objectives of the Paris Agreement.
As part of its corporate financing activity, the Group has for the past three years been evaluating the carbon footprint (indirect emissions) of its balance sheet commitments. In this regard, the transport and energy sectors appear to be the two sectors with the greatest impact (representing 79% of the carbon footprint of the Group’s balance sheet commitments).
In order to identify the alignment indicators and targets across a larger section of the portfolio, the Group is testing (in the pilot stage) an analysis methodology developed by the 2°C Investing Initiative (2DII). The main strength of this method is its use of detailed corporate data. Accordingly, it is possible to measure the discrepancy between the portfolio’s profile and the profile it should strive for (based on climate scenarios).
More specifically, the method measures the extent to which the Group's portfolio is aligned regarding the sectors most exposed to fossil fuel extraction (oil, gas and coal) for electricity generation, automotive production, and four other carbon-intensive sectors (namely steel, cement, aviation and maritime transport).
The sharing of best environmental practices
Within the UNEP-FI, the Group has contributed to developing a methodology enabling financial institutions to better understand the climate change risks of their activities.
As an active member of the European Banking Federation (EBF) and the French Banking Federation (FBF), Societe Generale acts to promote the appropriate regulation of sustainable finance in Europe. The Group supports the Commission’s legislative proposals on sustainable financing, based on its action plan for financing sustainable growth (see: https://www.ebf.eu/wp-content/uploads/2018/ 12/EBF_035239-EBF-key-messages-on-the-EP-draft-report-on-taxonomy. pdf).
The Group is also participating in a study by the French Association of Private Companies (AFEP) on the comparison of 2°C scenarios and in a different study by Entreprises pour l’Environnement (EpE) ZEN 2050 on the decarbonisation of the French economy by 2050.
For further informations:
Action plan of EBF and FBF to finance sustainable growth
CSR ambition in favor of energy transition
In December 2017, Societe Generale committed to raising EUR 100 billion in financing earmarked for the energy transition between 2016 and 2020.
By the first quarter of 2019, the Group had already achieved 78% of its goal (EUR 56.4 billion in green bonds and EUR 21.5 bilion for the renewable energies sector).
Reinforce Group’s E&S policies
In 2015, the Bank committed to reducing its coal-related activities and to bringing its exposures to this energy in line with a strategy compatible with a temperature rise not exceeding 2°C by 2020 (the 2°C scenario of the International Energy Agency (IEA)).
Accordingly, as at the end of 2018, the Bank:
- reduced its outstanding credit (exposure) related to coal mining by more than 10%; the aim being to achieve a 14% reduction between 2016 and 2020;
- limited the proportion of coal (installed capacity) in the energy mix of the electricity production financed. The commitment has nearly been achieved, with a 19.3% proportion of carbon (aim of achieving less than 19% in 2020).
Societe Generale has not participated in any dedicated financing for coal-fired power plants or related infrastructures anywhere in the world since 1st January 2017.
Moreover, it has not been involved in any dedicated financing for the development of coal mines and related infrastructures since 2015. In addition, specific criteria for establishing new relationships with companies that operate in the coal sector have been defined in dedicated sector policies.
In 2018, the Oil and Gas policy was updated. The Group committed to finance only those activities in the oil and gas sector that have a mitigated impact on the climate. In particular, Societe Generale will no longer finance activities relating to the production of oil from oil sands anywhere in the world or to the production of oil in the Arctic. These commitments also target the implementation or commitment to implement measures to limit continuous flaring and methane emissions. For companies using fracking techniques, they also include the implementation of best E&S practices in line with the Golden Rules of the IEA (International Energy Agency).
Group’s reduction carbon footprint
As part of its 2014-2020 carbon reduction programme, Societe Generale has undertaken to cut its greenhouse gas emissions by 25% per occupant and to improve the energy performance per occupant of the Group’s buildings by 20% by 2020 as compared to 2014 levels.
At the end of 2018, greenhouse gas emissions per occupant were down 19% on 2014 levels and energy performance per occupant had improved by 21.5% as compared to 2014.